Microeconomic Policy Flashcards
Define microeconomic policy
Policies aiming to increase aggregate supply by improving efficiency and productivity of producers and industries
Define ‘supply-side’ economics
Aims to reduce biz costs, which should shift AS curve to the right (increase) > more g/s should be provided at lower prices
Define structural change
Involves changes in the pattern of production that reflect changes in technology, consumer demand, global competitiveness, and other factors > results in some products, processes, and entire industries disappearing while others emerge
Distinguish between product and factor markets
PRODUCT: include the market for goods such as motor vehicles and services such as transport
FACTOR: markets for inputs of production such as labour market and financial markets
Outline the aspects of the ‘microeconomic theory’ on distortions
Concept that product and factor markets are often more efficient if:
- there’s greater competition between private bizs
- market forces of supply and demand are able to operate without interference from govt rules
Define allocative efficiency
Economy’s ability to shift resources to where they are most valued and can be used most efficiently
How is allocative efficiency achieved?
- In a FREE MARKET economy resources should shift to producers w/ the greatest capacity to pay
- Achieves this by minimising distortions to market economy (e.g. govt regulations, subsidies, anti-competitive behaviour etc.)
What are the benefits of allocative efficiency?
Promotes structural change by allowing resources to flow to those areas where they are used more efficiently
Define technical efficiency
Economy’s ability to produce the maximum level of output from a given quantity of inputs
How is technical efficiency measured?
By the productivity of a biz or an economy: how much output can be produced from a given quantity of inputs
What are the benefits of achieving technical efficiency?
Greater productivity > bizs can produce output more cheaply > makes them more competitive in global and domestic markets
Define dynamic efficiency
Economy’s ability to shift resources between industries in response to changing patterns of consumer demand
How can an economy achieve dynamic efficiency?
- By eliminating distortions (e.g. excessive govt regulations and subsidies) dynamic efficiency improves and accelerates structural change
- Increasing the level of competition in industries > tends to force producers to be more responsive to changes in demand and supply
What are the benefits of dynamic efficiency?
Dynamically efficiency producers > able to adopt new technologies and innovative biz practices
How does structural change occur?
It can be:
- Market induced (changes in C patterns, demographic factors etc.)
- Government induced (changes in policies, industry or environmental regulations)
