4.2 - Aggregate Supply Policies Flashcards
Capacity Constraints
Factors that prevent or constrain an economy from producing more goods and services, such as skill shortages and infrastructure bottlenecks
Aggregate Supply
The total volume of good and services that all suppliers have produced and supplied over a period of time
Aggregate Supply Policies
- Government strategies that seek to grow the productive capacity or potential of the economy, especially in the long term, by increasing the willingness and ability of suppliers of goods and services to produce
- Aim to improve living standards by improving supply conditions, helping to achieve macroeconomic goals
- Includes measures that:
o Increase efficiency in resource use
o Increase the quantity of resources available
o Incentivise businesses to expand capacity
o Increase levels of competition to encourage efficiency
o Address capacity constraints
Efficient Allocation of Resources and Aggregate Supply
- Productive Efficiency → economy maximising outputs from a given level of inputs → expands production and productive capacity → increases AS
- Dynamic Efficiency → ensures resources are reallocated quickly through innovative means → expands production and productive capacity → increases AS
- Intertemporal Efficiency
o Short term: restricts access to resources → decreases AS
o Long term: mitigates effects of climate change, eg. crop destruction, extreme weather → increases production and productive capacity → increases AS - Allocative Efficiency → economy maximising outputs from a given level of inputs → expands production and productive capacity → increases AS
Aggregate Supply Policies and International Competitiveness
- AS Policies → increased efficiency and production → Australian goods and services cheaper in foreign terms → increased international competitiveness
Aggregate Supply Policies and Strong and Sustainable Economic Growth
- Increased AS → allows for greater production → increased economic activity → increased economic growth
- Increased AS → expands productive capacity → reduces cost inflationary pressures → reduced inflation
Aggregate Supply Policies and Low Inflation
- Increased AS → expands productive capacity → reduces cost inflationary pressures → reduced inflation
Aggregate Supply Policies and Full Employment
- Increased AS → expands productive capacity → increased production → increased derived demand for labour → increased employment
Aggregate Supply Policies and Living Standards
- Increased employment → improved material and non material living standards
- Increased access to goods and services → improved material and non material living standards
Infrastructure
- Physical or organisational structures within an economy that provide the foundation for economic activity to take place
- Investment in infrastructure is government capital expenditure (G2) to develop infrastructure
- Includes road, rail, gas, telecommunications, sewerage, water, seaports, airports and electricity
- Infrastructure Australia prioritises nationally significant infrastructure
- Examples:
o Inland Railway – cuts distance between Melbourne and Brisbane by 200km, reducing travel time to under 24hrs
o $120bn infrastructure pipeline
Impact of Infrastructure on Aggregate Supply
- Increased productivity, decreased costs and removal of capacity constraints → increased willingness and ability to produce → increased productive capacity → increased aggregate supply
Impact of Infrastructure on International Competitiveness
- AS Policies → increased efficiency and production → Australian goods and services cheaper in foreign terms → increased international competitiveness
Impact of Infrastructure on Strong and Sustainable Economic Growth
- Increased AS → allows for greater production → increased economic activity → increased economic growth
- Increased AS → expands productive capacity → reduces cost inflationary pressures → reduced inflation
Impact of Infrastructure on Low Inflation
- Increased AS → expands productive capacity → reduces cost inflationary pressures → reduced inflation
Impact of Infrastructure on Full Employment
- Increased AS → expands productive capacity → increased production → increased derived demand for labour → increased employment
Impact of Infrastructure on Living Standards
- Increased employment → improved material and non material living standards
- Increased access to goods and services → improved material and non material living standards
Trade Liberalisation
- Government policy initiatives designed to promote free trade or reduce barriers to trade, including quotas, tariffs and subsidies
Short Term Impact of Trade Liberalisation
- Increased levels of competition → forces local businesses to restructure to remain competitive and take advantage of new opportunities in areas of competitive advantage or go out of businesses → increased productivity
Short Term Impact of Trade Liberalisation on Aggregate Supply
Decreased cost of imported resources and increased levels of productivity → increased ability and willingness to produce → increase productive capacity → increased AS
Short Term Impact of Trade Liberalisation on International Competitiveness
Increased AS → decreased cost inflationary pressures → Australian goods and services cheaper in foreign terms → increased international competitiveness
Short Term Impact of Trade Liberalisation on Strong and Sustainable Economic Growth
o Increased AS → reduced cost inflationary pressures → low inflation
o Increased AS → increased production → increased economic activity → increased economic growth
Short Term Impact of Trade Liberalisation on Low Inflation
Increased AS → reduced cost inflationary pressures → low inflation
Short Term Impact of Trade Liberalisation on Full Employment
restructure of workforce → increased structural unemployment so goal not achieved
Short Term Impact of Trade Liberalisation on Living Standards
o Decreased employment → deterioration material and non material living standards
o Increased efficiency → reduced exploitation of resources → increased environmental quality
Impact of Trade Liberalisation of Resource Allocation
o Increased competition → forces producers to be more efficient → increased outputs from inputs = productive efficiency
o Increased competition → forces producers to be more efficient → increased outputs from inputs → improved living standards = allocative efficiency
o Increased competition → forces producers to be more efficient → increased outputs from inputs → reduced resource exploitation = intertemporal efficiency
o Increased competition → producers need to be more innovative and responsive to contemporary changes = dynamic efficiency
Long Term Impact of Trade Liberalisation
- Resources reallocated to more efficient sectors of economy
Immigration Policy
- Strategic supply side approach to managing the number of migrants coming to Australia
- Current policies aim to attract young, English speaking and suitably skilled people who are likely to make a valuable and ongoing economic contribution to the labour force and economy
2023/24 Immigration Policy
- Skill stream includes 137k migrants = 72% of all migrants
Impact of Immigration on Aggregate Supply
- Increase supply of labour = increased quantity of factors of production → increased AS
- Increased supply of labour → decreased pressure on wages = decreased cost of production → increased AS
- Alleviates capacity constraints in skilled sectors of economy → increased production → increased AS
- Intake of young, skilled workers → increased productivity → increased AS
Impact of Immigration on Population, Participation and Productivity
- Population: immigration has made the largest contribution to growth in Australia’s working age population since the 1980s
- Participation: immigration ensures adequate supply in the labour market → increased labour force participation rate
- Productivity: intake of young, skilled workers combined with alleviating capacity constraints in skilled sectors of economy → increased productivity
Impact of Immigration on Strong and Sustainable Growth
- Increased AS → increased willingness and ability to produce → increased production → increased economic activity → increased growth
- Increased AS → reduced cost inflationary pressures → low inflation
Impact of Immigration on Low Inflation
- Increased AS → reduced cost inflationary pressures → low inflation
Impact of Immigration on Full Employment
- Increased availability of skilled labour → decreased unemployment rate
- Increased availability of labour → decreased wage pressures → prevents employment from creating inflationary pressures
Impact of Immigration on International Competitiveness
- Increased AS → reduced cost inflationary pressures → reduced cost of Australian goods and services → increased international competitiveness
Impact of Immigration on Living Standards
- Reduced cost of goods and services → increased availability → increased material and non material living standards
Environmental Policy
- Seeks to minimise environmental harm often associated with growth, such as depletion of non-renewable resources or common access resources
- Market based environmental policy – alters relative prices and creates incentives to minimise emissions
Emissions Trading Scheme
- Places a price on CO2 emissions by creating a market for tradeable emissions permits
- Businesses issued a certain amount of permits, based on their size
- Businesses who do not use all of their permits can either save them for the future, or sell them on the market for a profit
- Businesses who exceed their permit allocation will need to buy additional permits on the market
- Thus creates an incentive for businesses to produce in more sustainable ways
- Supply of permits is capped and reduces over time
Short Term Impact of Environmental Policy on Aggregate Supply
Increases cost of production → reduces willingness and ability to produce → reduced aggregate supply
Long Term Impact of Environmental Policy on Aggregate Supply
Improved environmental conditions → increased availability of resources → increased ability to produce → increased aggregate supply
Short Term Impact of Environmental Policy on Intertemporal Efficiency
Limited impact as businesses take some time to adjust to financial incentives
Long Term Impact of Environmental Policy on Intertemporal Efficiency
Financial incentives → reduction in emissions → reduced impact of climate change → improves living standards for future generations
Short Term Impact of Environmental Policy on Living Standards
- Reduced AS → increased cost inflation → decreased access to goods and services
- Reduces AS → reduced production → reduced derived demand for labour → increased unemployment → reduced incomes
Long Term Impact of Environmental Policy on Living Standards
- More sustainable businesses become more profitable → increased production → increased demand for labour → decreased unemployment
- Improvements to environment, including air quality and recreation opportunities → improvements in health
