• Limit: 1000 words (diagrams do not count towards the word limit) Take, as an example, the world market for a mineral of your choice (e.g. iron ore, coal etc.) and assume that individual mining firms...

Take, as an example, the world market for a mineral of your choice (e.g. iron ore, coal etc.) and assume
that individual mining firms are price takers. Develop an economic model, including appropriate
diagrams, to assess the effects of a technological change (which must be properly referenced), on firm
decisions and world market outcomes. In your answers, assume that the world market is the only
elevant market for the industry.
(a) Brief description of the industry and its competitive structure, and of the new technology. [2 marks]
Let us take the example iron ore for our analysis. Iron ore, the most valued mineral resource, is
produced and supplied by several individual mining firms across the world. We have assumed
the individual iron ore firms are price takers. It implies they produce and sell at the price that is
determined by the world market. World market is considered as the only relevant market for the
industry. It implies the summation of individual mining firm’s supply constitute the supply in the
global market. The world price is determined by the intersection of demand for and supply of
iron ore. The assumption of the existence of many individual firms in the global market and their
price taking behavior suggest that market for this mineral resource is perfectly competitive. We
further assume that iron ore produced and supplied by individual mining firms is homogenous in
nature to substantiate our analysis.
New technology plays an important role in iron ore market. Improved technology has
significantly increased the production efficiency. The exiting firms are now able to produce and
supply iron ore in the global market at a lower production cost. Technological up gradation has
substantially reduced their average variable cost and marginal cost. A lower cost of production
will boost the sales and profitability for the individual iron ore firms. Since the existing firms
will produce more iron ore due to new technology, we will observe an increase in world supply
of iron ore. (McEachern 2014)
(b) Base case scenario of long-run equili
ium for industry and a typical or representative mining firm. [3
marks]
Microeconomic theory defines long run as the time period when all the factors of production are
variable. So the existing mining firms can change all their inputs. Besides perfect competition is
consistent with free entry and exit of iron ore mining firms- they can either come and join or
leave the industry according to their convenience. They are allowed to free entry and exit
ecause of unavailability of any ba
iers to the industry. New firms tend to enter when the
existing iron ore firms are making...