Microeconomic Policies

Question 1

What are microeconomic policies?

Answer 1

Policies which aim to increase Aggregate Supply by improving the efficiency and productivity of producers

These policies are aimed at individual industries or markets

Question 2

What are some key aspects of Australia’s history with microeconomic reform?

Answer 2

During the 1980s and 1990s, Australia experienced transformative microeconomic reform which largely increased the efficiency of the economy

This was a key component to Australia’s strong economic growth over the past 28 years

Question 3

How does microeconomic reform impact aggregate supply and efficiency?

Answer 3

Microeconomic reform may have high costs and can restrict short-term economic growth, but the benefits of long-term productivity and international competitiveness increase economic growth in the long-term

Microeconomic reform can be illustrated by an increase in the supply curve

Question 4

What is the impact of competition on firms?

Answer 4

Exposing firms to greater competition encourages them to improve their own performance

Competitive pressures promote the efficient operation of markets, increasing productivity, and improving flexibility/responsiveness to change

Question 5

What are the three types of efficiency gains from macroeconomic policies?

Answer 5

Technical/productive efficiency: where firms are able to produce more output with lower opportunity cost

Allocative efficiency: where the prices charged reflect the marginal cost of production (resources are allocated to reflect consumer preferences)

Dynamic efficiency: where firms are increasingly able to adapt to changing circumstances

Question 6

What are the benefits of microeconomic policies?

Answer 6

Greater efficiency and productivity growth in long-term due to increased AS, which can also increase the comparative advantage of exports and increase GDP/economic growth overall

New business and job opportunities

Higher AD = Lower Prices = Higher Living Standards

Helps to overcome the structural problems of an economy (eg low rate of savings)

Question 7

What are the costs of microeconomic policies?

Answer 7

Higher unemployment in the short term

Closure of inefficient business and industries

Less equal distribution of income, as higher income earners tend to benefit most

Increased government cost to retrain redundant workers

Question 8

What is capital deepening & widening?

Answer 8

Capital deepening is the use of more machines per worker (between 2001-2018 capital deepening productivity grew 1%)

Capital widening occurs when the capital-labour ratio remains constant but output grows

Question 9

What is deregulation?

Answer 9

The removal of rules that constrain the operation of market forces, with the aim of improving the efficiency of industries

Question 10

Why do governments undertake deregulation?

Answer 10

Because protection;

• increases the bureaucratic costs to government
• protected industries become lazy due to expecting favourable treatment
• causes a high opportunity cost due to an inefficient use of resources

Question 11

What is the National Competition Policy?

Answer 11

An agreement between Australia’s Federal and State Governments made in 1995 to encourage microeconomic reform throughout the economy

Under the policy, governments agreed to implement reforms in sectors that functioned as monopolies, such as gas, water and electricity

The Competitive Neutrality Principle - governments agreed to remove special provisions that gave PTEs an advantage over private sector companies

It is overseen by the ACC

Question 12

How does ‘workable competition’ fit into the National Competition Policy?

Answer 12

Sometimes in order to achieve international competitiveness, it may be necessary to reduce the number of firms in an industry

Those remaining firms can then operate on a larger scale and achieve the lowest possible long-run average costs of production

Question 13

What was the significance of the Fair Work Act 2009 (Cth)

Answer 13

Allowed for the centralisation of the industrial relations system, as well as increased efficiency in the provision of labour wage conditions

Compliance is ensured by the Fair Work Ombudsman

Question 14

What are the current statistics on those covered by formal and informal wage agreements?

Answer 14

36% Covered by Enterprise Agreements

36% Covered by Common Law Contracts

23% Covered by Awards

Question 15

What are some key features of the national labour system?

Answer 15

The 11 Minimum Employment Standards (eg maximum of 38 hours per week)

Minimum wage rates (reviewed annually by the FWC)

Question 16

What are awards?

Answer 16

A legal document that outlines the minimum wages and working conditions for all employees in an industry

Question 17

What are enterprise agreements?

Answer 17

Where pay and conditions are negotiated between an employer and a union/group of employees

This is then approved by the FWC, who ensure that it does not violate the better off overall test

Question 18

What are common law contracts?

Answer 18

Private agreements between an employer and employee, which still must comply with industrial law

Question 19

What are three methods of workplace dispute resolution?

Answer 19

Collective Bargaining - a form of negotiation between employers and groups of employees/unions

Conciliation - where Fair Work Australia or a third party act as a mediator and suggest solutions

Arbitration - where an industrial tribunal sets a legally binding decision on the dispute

Question 20

What are arguments in favour of decentralisation?

Answer 20

It promotes an efficient allocation of resources, as efficient firms can pay more for labour and attract higher skilled workers

There is also an incentive to increase work efficiency, as labour is rewarded directly - reducing inflationary pressures

Wage flexibility helps the labour market adjust to fluctuations in the economy

Question 21

What are arguments against decentralisation?

Answer 21

Greater inequality, as low-income earners may experience a lack of bargaining power

Cost-push inflation may occur if unemployment dips below the NAIRU

Contracts can be difficult to enforce

Question 22

What are examples of education, training and employment programs?

Answer 22

The National Plan For School Improvement - in 2013, increased government spending in schools by $15 billion

Job Active - the government’s national employment services system, which provides training, skills development and work experience

Question 23

What is an example of an Australian regulation of the environment?

Answer 23

The Environment Protection and Biodiversity Conservations Act of 1999 is a government policy to combat environmental issues through establishing a regulatory framework

Eg - it mandates licensing requirements for commercial development

Question 24

What is an example of a market-based policy to promote environmental sustainability?

Answer 24

The Product Stewardship for Oil Program imposes an 8.5 cent per litre levy on the purchase of oil, to help fund and encourage the recycling of old oil

Question 25

How is the Australian government working towards international agreements?

Answer 25

To deliver on Australia’s 2030 Kyoto target to reduce emissions 26-28% below 2005 levels, the government is investing 3.5 billion in a Climate Solutions package

Question 26

What are the three different types of time lags with regard to economic policies?

Answer 26

Policy Lag - the length of time that elapses between a change in the stance of economic policy and its effects on real economic activity

Implementation Lag - the time it takes for the government to make or change policies

Impact Lag - the time it takes for a new policy to have an impact on the economy

Question 27

What are the time lags for each type of policy?

Answer 27

Fiscal - a medium-term implementation lag, as the budget is decided annually and a short term impact lag, as spending multiplies AD at a fast rate

Monetary Policy - a short term implementation rate (cash rate reviewed monthly), medium term impact rate (spending adjusts to the changing price of borrowing

Microeconomic - a long term implementation lag (policies are often researched and developed long before they are implemented) long term impact lag (can take up to 20 years for structural reform)

Question 28

What are two examples of global limitation to economic policies?

Answer 28

Financial Contagion - during the GFC, domestic economies were affected adversely by global conditions

World Economic Policy - the WTO forced Australia to abandon its ban on fresh salmon imports from Canada

Question 29

What are the political constraints to economic policy?

Answer 29

Although the long-term structural change of microeconomic policies can prove beneficial for an economy, the short-term impacts (unemployment) can prove very unpopular politically