Microeconomic Reform (Ch 14)

Question 0

Define technical efficiency

Answer 0

Firms maximizing amount of output using the least lost combinations of inputs (e.g. Labor, capital and technology)

Question 1

What is microeconomic reform?

Answer 1

Describes all government actions to reduce institutional and regulatory impediments to a productive and efficient economy.

Question 2

Define allocative efficiency

Answer 2

Allocative efficiency is when the economy is doing the best job possible of satisfying unlimited wants and needs with limited resources – that is, of addressing the problem of scarcity as well as minimizing opportunity.

Question 3

Define dynamic efficiency

Answer 3

The ability of the economy to initiate and adapt to change over time and to take advantage of new opportunities as they arise.

Question 4

Define productivity

Answer 4

A nation’s productivity is the ratio of the volume of goods and services it produces (its output) to the volume of inputs it uses in production.

Question 5

What is the “law of diminishing demand”? (Relevant to APF)

Answer 5

As inputs increase, the level of output increases at a successively diminishing rate.

Question 6

Define multifactor productivity

Answer 6

Output produced per combined input of about and capital.

Question 7

Define efficiency

Answer 7

Maximizing output given the resources available.

Question 8

How can firms increase productivity?

Answer 8

• Better machinery
• Education and training
• Better management
• Marketing
• Innovation

Question 9

Define embodied technological change

Answer 9

When technology is incorporated in some tangible way (e.g. Machinery)

Question 10

Define disembodied technological change

Answer 10

Less tangible technological change (e.g. New ideas, strategies to improve productivity)

Question 11

Define structural change

Answer 11

The natural process by which firms change their patterns of production in an economy over time due to variations in patterns of demand and supply.

Question 12

What are the indicators of structural change? (5)

Answer 12

Changes in...
• Patterns of employment
• Proportion of GDP for various sectors
• Spending patterns
• The nature of business activity
• Patterns of resource usage

Question 13

What are the strengths of MER? (5)

Answer 13

1) Productivity gains
2) Flow on effects of lower prices
3) Quality improvements
4) Improved International competitiveness
5) Focus

Question 14

Why is “flow on effects of lower prices” a benefit of MER?

Answer 14

ALL businesses in Australia will have lower input costs, including infrastructure industries, such as telecommunications, banking and transport. This will lead to a further reduction in production costs which reduces inflation and increases competition.

Question 15

What are the weaknesses of MER? (5)

Answer 15

1) Political obstacles
2) Implementation lag
3) Recognition lag
4) Impact lag
5) Structural UE

Question 16

What is the relationship between structural change and MER?

Answer 16

MER does not drive structural change but reduces impediments to change and helps create an environment in which changes are encouraged and accepted.

Question 17

What is the impact of MER on the AS model?

Answer 17

• Improving competitiveness, productivity and efficiency of the Australian industry increases levels of AS.
(As seen from the shift of both the LRAS and SRAS to the right)
Thus, resulting in an INCREASE in output and a DECREASE in price.

Question 18

Why is focus a benefit of MER?

Answer 18

Monetary policy is considered a blunt instrument, and fiscal policy can only be used to affect some sectors of the economy, microeconomic reforms can be implemented in any sector that is deemed to be in need of change and can identify problems on a “case to case” basis.