Chapter 5: AS Policies Flashcards
What is AS?
The total production of goods and services over a period of time by the nation’s businesses.
Note: It is especially affected by the availability of a nation’s resources and the efficiency with which these resources are used
What are AS policies?
policies designed to create more favourable conditions for firms so that they become more willing and able to produce, causing an increase in AS and productive capacity by affecting access, cost or efficiency of resources (ACE)
International competitiveness
How do AS policies differ from AD policies?
work in diff. ways + use diff. theories e.g. demand-side Keynesian economics (demand creates supply) vs. supply-side economics (supply creates demand)
work on slightly diff. problems - AD policies address cyclical problems e.g. demand inflation, cyclical unemployment etc. vs. AS policies address structural problems e.g. cost inflation, natural unemployment etc.
operate in diff. time frames - AD policies address short to medium-term drivers of economy vs. AS policies address longer-term factors
What is efficiency?
The change in the ratio of output gained from per unit of inputs.
What is economic efficiency?
When there is maximum output gained from a given volume of productive inputs, thereby maximising society’s general wellbeing and material living standards. It can mean allocative, dynamic, productive and intertemporal efficiency
Define allocative efficiency
When resources are distributed in ways that maximise society’s satisfaction and minimise opportunity costs.
How can AS policies improve allocative efficiency?
promoting strong comp. via measures like market deregulation so resources directed to areas of competitive cost advantage = minimise opp. cost
gov. intervention sometimes needed to correct market failure & promote more efficient allocation of resources
Define Productive or Technical Efficiency
When lowest cost production methods are used and wastage of resources in making goods and services is minimised.
Anywhere along the lines of the PPF curve is technically efficient; increase in technical efficiency would help shift PPF outwards.
How can AS policies improve productive or technical efficiency?
R&D grants lower COP, helping firms employ most efficient resources (e.g. best tech + equipment) to produce
Define dynamic efficiency
When resources are reallocated quickly to increase choice and better meet the changing needs of consumers. Shown on PPF as moving along curve quickly.
How can AS policies improve dynamic efficiency?
R&D grants to encourage firms to innovate, develop new products & be creative - encouraging market flexibility
Define intertemporal efficiency
Refers to finding a balance between current consumption versus saving for future consumption. On PPF curve it can refer to anywhere not on the edges as either extremes are not balancing resources across long term
How can AS policies improve intertemporal efficiency?
Tax reform
Investment in infrastructure
Subsidising certain areas of production
What is international competitiveness?
Refers to the degree to which Australian firms can sell more attractive goods and services at lower prices than their overseas rivals.
What are the main aims of AS Policies?
The main aims of aggregate supply policies is to increase AS (total quantity of goods and services a nation can produce) via the achievement of these goals:
Improving efficiency in resource allocation — growing Australia’s productive capacity, potential GDP and aggregate supply through increasing efficiency (the change in the ratio of output to input).
Boosting the sustainable, non-inflationary rate of economic growth — our rate of economic growth is limited to the speed at which our productive capacity can expand. This is dependent on the level of production that can be achieved from available resources at any given time.
Promoting low inflation by cutting production costs — aggregate supply policies such as market deregulation and infrastructure investment aim to keep costs down and thus reduce cost inflationary pressures on businesses.
Promoting full employment, especially in the long term — aggregate supply policies such as spending on education and training and welfare and tax reform can improve the flexibility and efficiency of labour resources and improve the employability of a greater number of people.
Increasing Australia’s international competitiveness — aggregate supply policies can make local businesses more internationally competitive by improving efficiency, and keeping production costs and inflation low.
Improve living standards as GDP per capita rises alongside a rise in average incomes and fall in unemployment/lower cost inflation and purchasing power
What are AS budgetary policies?
Measures involving changes in the composition of gov. receipts and outlays that can grow a nation’s productive capacity and potential GDP
Identify four specific AS policies
Investment in infrastructure
Spending on edu. + training
Gov. subsidies
R & D grants
What is infrastructure investment?
Refers to gov. outlays on capital resources (G2)
Identify and outline the two types of infrastructure
Social infrastructure: provision of capital goods to facilitate services like health + edu.
Eco. infrastructure: key physical/organisational structures within eco. that help eco. activity take place e.g. highways, railways, sea ports, airports, electricity capacity, gas, telecommunications, sewerage, water supply etc.
Identify recent AS measures involving investment in infrastructure
Investment of $2 Billion on fast rail connection between Geelong & Melbourne
Additional $3 Billion to Urban Congestion Fund to address traffic levels
$2.2 Billion for local and state gov. road safety package
$4 bn Roads of Strategic Importance Fund, as part of $110 bn in infrastructure investment over the next decade
How does infrastructure investment boost AS and the SSEG?
Improved infrastructure = improved ACE = favourable AS factor = more willing and able to produce = increased AS & GDP, pushing rate of growth towards target of 3-3.5%
How does infrastructure investment boost AS and slow inflation?
Improved infrastructure = improved ACE = favourable AS factor = more willing and able to produce = increased AS & GDP = reduced cost inflation (sellers incur lower costs and pass on lower costs to consumers) = pushing towards goal of 2-3% increase in general price levels
How does infrastructure investment boost AS and lower unemployment
Initial development of infra. requires more labour = job openings
Improved infrastructure = improved ACE = favourable AS factor = more willing and able to produce = business expansion = employ more labour = reduce unemployment rate towards goal of 4.5-5% + increased AS & GDP
How does infrastructure investment improve international competitiveness?
Improved infrastructure = improved ACE = sellers able and willing to sell at lower market prices = more internationally competitive & able to expand
How does infrastructure investment help support higher living standards?
Increasing SSEG and reducing inflationary pressures and unemployment = higher purchasing power + average incomes + production levels = higher levels of consumption + increased satisfaction of needs and wants (improved MLS) and improved happiness, self-esteem, health outcomes (improved NMLS)
What are weaknesses of gov. investment spending on infrastructure?
Poor decisions: despite high levels of investment in infrastructure, multifactor productivity slowing. For some projects, returns barely outweigh the added costs.
Long time lags in the implementation and completion of projects e.g. Sydney Airport = not a quick fix
Financial constrains: projects are expensive, increase budget deficit and may add to gov. debt
Infrastructure spending is too small for our rapid population growth: Despite billions of dollars in budget outlays, rapid population growth has meant that severe infrastructure bottlenecks remain in almost all key areas: electricity, roads, rail, water, aviation and telecommunications
What is government spending on training and education?
Refers to current spending involving the provision of new training programs/spending on wages/outlays on fees and support for students/families, as well as capital investment spending on new school/uni buildings or equipment.
AS policies are used in the long-term
True or False?
True
Used in the long-term to help increase skills, productivity, innovativeness and creativity of the Australian labour resources. Grows human capital, boosts productive capacity, GDP and AS.
Identify recent examples of AS policy on training & edu.
$17.7 Billion into Uni Sector in 2019 = universities more able to provide high quality edu. to students and create better members of workforce later on
How does spending on training and edu. boost AS and increase SSEG?
more productive workforce = improved ACE (higher output from given input = reduced COP) = favourable AS factor = more willing and able to produce = increased AS & GDP
How does spending on training and edu. boost AS and slow cost inflation?
More productive labour = reduced average COP for bus. = favourable AS factor = more able and willing to produce = increased AS = reduced cost inflation
