Microeconomic Reform: Basics

Question 1

What is the rationale for microeconomic reform?

Answer 1

To increase efficiency in order to increase aggregate supply and achieve economic growth without inflationary pressures.

Question 2

What is meant by ‘improving efficiency’?

Answer 2

Efficiency is producing more output with a given level of inputs.

Question 3

What is aggregate supply?

Answer 3

The total productive capacity of the economy.

Question 4

How is microeconomic reform done?

Answer 4

1) Increase regulations to maximise competition
2) Deregulate industries to remove distortions that prevent the price mechanism from allocating resources most efficiently

Question 5

What are 3 benefits of microeconomic reform?

Answer 5

1) Growth without inflation
2) Lower prices for consumers
3) Reduced risk of regulatory capture by rent-seeking firms

Question 6

What are 5 costs of microeconomic reform?

Answer 6

1) Structural unemployment
2) Widens inequality
3) Politically unpopular (difficult/slow to implement)
4) Time lag of up to 20 years before the full benefits occur
5) Increased volatility (less gov control of the economy)

Question 7

What are the 3 types of efficiency?

Answer 7

• Allocative efficiency
• Technical efficiency
• Dynamic efficiency

Question 8

What is allocative efficiency?

Answer 8

Resources in the economy are used for the products and industries that are most profitable

Question 9

What is technical efficiency?

Answer 9

Firms minimise the costs of production

Question 10

What is dynamic efficiency?

Answer 10

Firms and industries quickly shift their production in response to changes in the market

Question 11

Mining firms receive most of the investment and labour in an economy, because that is what the economy has a comparative advantage in. Which type of efficiency is this?

Answer 11

Allocative efficiency

Question 12

Mining firms reduce their production of fossil fuels and shift to mining lithium for solar panels and batteries due to a change in global demand for renewable energy resources. Which type of efficiency is this?

Answer 12

Dynamic efficiency

Question 13

Mining firms increase their use of capital to reduce production costs. Which type of efficiency is this?

Answer 13

Technical efficiency

Question 14

What is the difference between a product market and a factor market?

Answer 14

A product market is where goods and services are sold to individual consumers, whereas a factor market is where the factors of production are sold to firms as inputs

Question 15

Why is reform in a factor market more significant than reform in a product market?

Answer 15

A more efficient factor market will reduce costs for all firms that purchase that input, whereas a reform in a product market will only reduce the cost of that specific product

Question 16

What are time lags for microeconomic policy?

Answer 16

Implementation: Can take up to a year to pass through Parliament
Impact: Can take 10-20 years for the full benefits of structural change to be felt in the economy

Question 17

Why are global considerations a limitation of microeconomic policy?

Answer 17

Reforms must maintain global investor confidence to prevent a fall in foreign investment and currency. Generally though, global investors like microeconomic reform like deregulation and privatisation

Question 18

Why are political constraints a limitation of microeconomic policy?

Answer 18

Microeconomic reforms often lead to volatility and structural unemployment, so they are politically unpopular and difficult to pass through Parliament

Question 19

What are some examples of reforms in a factor market?

Answer 19

• Financial deregulation
• Labour market decentralisation