Analysis
Demand and supply are one of the important and major theories of economies. The other theories and models of economies are heavily dependent on the assumptions of the demand and the supply theory. In this study, a news article has been analysed and explained through the use of principles of demand and supply. The news article considered for the study is “Demand for Australian coal escalates, building on last year’s turnaround” which was published in the newspaper ABC News Australia. Information from this source and from other related secondary sources have been used in presenting the study of this paper.
The ABC news Australia is a subsidiary news channel of Broadcasting Department of the Australian government. In this news portal, on 28th June 2018, news has been published that highlights the increase in the demand for Australian coal in the international marketing. It is important to note that Australia is among the top coal-producing countries of the world. The annual coal production of Australia, as per the figure for 2017, is 580 million tonnes which helps it to stand at a 4th place in the list of largest coal producing nations of the world. In addition to that, it is also important to note that, a significant portion of the produced coals of Australia is exported to Asian countries (“The demand and supply of criminal opportunities.” 2018). Apart from the Asian countries, Australia also exports coal to different Europeans and Latin American nations as well.
As per the report, the demand for coal from the side of Asia has increased since the last year. It has been reported that, by the year 2030, the demand for coal of Australia will increase by 400 million tonnes. That means, in this case, the demand curve has shifted to the right side. Although there has been no influence on the supply side of the coal market, the prices have increased following the principles of demand and supply. The article reports that Newcastle harbour is experiencing a rise in the docked ships that are here to collect coals or to deport coals to the markets of Asia (Fama and Kenneth 2016). According to the principle of demand and supply, the increase in demand for a certain product can be due to various external reasons. This is due to the facts that, demand for a certain product depends on external factors such as income of the customers, number of customers of the market, changes in the tastes and the preferences and many more. In each of the cases, the changes shift the demand curve either to the right or to the left.
Effects of external factors on the equilibrium of the market
Figure 1: The supply and demand in the coal market in the short run
(Source: Friedman, Milton 2017)
In this context, the article reports that the root of the increase in the demand for coal has been the changes in the market. There have been two factors that have led to the rightward shift of the demand curve. First and the foremost is the income of the customers of the market. In this case, the customers of coal in the market are the Asian countries. (Iossa and David 2017) stated that, Asian countries have shown signs to further development since the year 2013. It also needs to be noted that, 2013 is also the year, the coal industry of Australia deteriorated. Nevertheless, the boom in the economy of the Asian countries led to the development of infrastructure in this area. As a result, each of the countries which used to be trade partners with Australia before 2013 increased their demand for coal from Australia.
Another important factor that has led to the increase in the demand for coal from Australia is the fact that, since the year 2013, other Asian countries which did not trade partners with Australia started to increase in economic activity. According to the reports, countries such as Malaysia, Vietnam and Thailand became one of the important trade partners in Australia. The economic growth and the development allowed these countries to increase their demand for affordable coal from Australia too. (Cowell 2018) in this regard noted that the population of these countries also played a significant role. The increasing population of these Asian countries led to more and more investment and hence the requirement for affordable energy increased. This is also explained by the principles of demand and supply theories as well (Sahlins 2017). According to theories of demand and supply, the increase in the number of customers leads to higher number of demand for a given price and hence the demand curve shifts to the right side. The same has been the case for Australia’s Coal market as well.
Figure 2: the supply and the demand for coal in the long run
(Source: Myers 2016)
Thus, these are the effects of the external factors that led to the changes in the market for Australian coal before the equilibrium price. Now, the increase in demand for the Australian coal also had its repercussions on the equilibrium of the market as well. (Waldman 2016) noted that, the major impact of changes in demand is on the equilibrium price level and the quantity. As per the theory of demand and supply, given the unchanged level of supply, when the demand curve moves to the right side the price increases. This is due to the fact that, as the supply is limited, the sellers sell the products to the customers who have the higher willingness to pay. Therefore, the market clearing price increases leading to an increase in the price. This explains the increase in the selling price of coal as well. The coal prices which plunged into $40 per metric ton during the year 2013, increased to around $200 per metric ton. The price elasticity of demand for coal is high and hence the demand is high as well. Despite the high prices, the queues in the harbours of Australia increased. According to, (Myers 2016) increase in demand with a given supply level can lead to a temporary shortage of supply which disallows a huge number of customers to buy the products from the market. The increase in the demand in case of Australian coal has resulted in a temporary shortage of supply in the market. Again, this supply shortage is also the reason behind the increase in the equilibrium prices in the coal market of Australia. However, one of the common repercussions that can be expected after the increase in demand for coal is the increase in supply too (Carbaugh 2016). That will enable the suppliers of the market to take the advantage from the increasing import demand from the countries of Asia. Although the process to increase the supply capacity of the market is long term it will shift the supply curve to the right side which will help in bringing down the prices of coal in the future. However, whether the prices for the coal will be lower than the initial prices before the increase in demand will depend mainly on the extent of increase in the supply capacity of the market relative to the increase in demand. If the increase in supply for the coal is lower compared to the increase in the demand, the price will fall but still be more than the initial market prices for Australian coal.
Impact of demand on the equilibrium price level and quantity
Now the concept of elasticity comes here too, Coal is among the products that are essential for daily operation of the economy. Coal produces energy which runs different activities of the economy. As the economy expands and the infrastructure develops, more and more coals are required. Apart from that, coal is also the cheapest energy forms available. Therefore the elasticity of coal is also very high. This explains the reason for high demand despite the price of coal in Australia being high. It also needs to be noted that when the prices of an elastic good such as coal increases revenue of the seller increases in the market. Consequently, more and more sellers get attracted to the market. This explains the possibility of higher supply capability of the market following this increase in the price of coal of Australia.
The repercussions of the supply-demand mechanism in the coal market of Australia does not end here. The report also highlights another market where this demand and supply theory can explain further changes. The housing market among the mining communities is also on the upswing. That means workers at the mining sites are raising their demand for housing in nearby areas in order to supply their labours in the mining site. Same as the coal market, the supply side of housing market among the mining community is also not changeable in the short run which eventually leads to increase in the price of housing market among the mining community (Friedman 2017). In this case, the supply curve remains unchanged in the short run and the demand curve for housing shifts to the right. Consequently, the prices of housing in these areas increase following the same logic as in the case of the coal market. The principle of demand and supply follows the same path and increases the prices for the housing.
Figure 4: The demand and supply for housing in the mining community in the short run
(Source: Friedman 2017)
Thus, this shows the inter-link between the different markets that the theory of supply and demand establishes. That also calls for further changes in the long run. In other words, when in the long run, the supply of coal would increase and the prices of coal would decrease. Less and fewer companies would be entering in the supply side and the labour demand would also fall. Consequently, the demand of the labours to buy a house in the nearby areas would also go down leading to normalcy or the reduction in the price of housing.
Conclusion
Therefore, this study focused on the analysis of a news article pertaining to the increase in the demand for coal supplied from Australia. The increasing demand comes from the improvement of the Asian trade partners of Australia in terms of economy. Apart from that, other countries also become trade partners of Australia corresponding to their respective economic performances. This following the theories of economies shifts the demand curve to the right side. Given the unchanged supply in the short run, the increase in demand resulted in prodigious supply shortage and hence the price for the coal of Australia soared. The study also showed how the market for coal of Australia may behave in the long run when the supply capacity of the market will increase. Besides, the study also sheds light on the interlinking effects of supply and demand theory. The demand and the supply mechanisms that worked in the coal market of Australia also influenced the housing market of the mining community as well. It showed the prices of one market can increase the price of another market which is linked to the former one. In the long run, with further changes in the market of coal, the price in both the market can become normalised in the future with the help of the supply and the demand mechanism of the market.
Reference
“Demand For Australian Coal Is Surging, Driven By Asian Growth”. 2018. ABC News. https://www.abc.net.au/news/2018-06-28/australian-coal-demand-surging-driven-by-asia/9914058.
Cook, Philip J. 2017. “The demand and supply of criminal opportunities.” In Crime Opportunity Theories, Routledge pp. 127-153.
Fama, Eugene F., and Kenneth R. French. 2016. “Commodity futures prices: Some evidence on forecast power, premiums, and the theory of storage.” In The World Scientific Handbook Of Futures Markets, pp. 79-102.
Friedman, Milton. 2017. Price theory. Routledge.
Friedman, Milton. 2017. “Quantity theory of money.” The new Palgrave dictionary of economics (2017): 1-31.
Iossa, Elisabetta, and David Martimort. 2017. “The simple microeconomics of public?private partnerships.” Journal of Public Economic Theory 17, no. 1 (2015): 4-48.
Kirschen, Daniel S., and Goran Strbac. 2018.Fundamentals of power system economics. John Wiley & Sons.
Cowell, Frank. 2018. “Microeconomics: principles and analysis.” Oxford University Press.
Sahlins, Marshall. 2017. “Stone age economics.” Routledge.
Waldman, Don, and Elizabeth Jensen. 2016. “Industrial organization: theory and practice.” Routledge.
Myers, Danny. 2016. “Construction economics: A new approach.” Routledge.
Carbaugh, Robert. 2016. “Contemporary economics: an applications approach.” Routledge.
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