Aggregate Supply policies    Goals of AS policies  Productivity v efficiency  Productivity v competitiveness  The impetus for AS policies  BP supply side initiatives  Industry policy  Microeconomic reforms  Labour market reforms  Benefits of LM flexibility  Trade liberalisation  MRPs and  internal stability  MRPs and  external stability  MRPs and equity  MRPs and living standards

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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MRPs and Stability in the level of domestic economic activity

Like AS policies in general, all microeconomic reforms are designed to improve efficiency and productivity.  Once an improvement in productivity is achieved, we have already seen that it effectively reduces the average costs of production for businesses and allows them to reduce prices to gain more market share from their competitors.  The drop in prices has flow on effects throughout the economy as the price reductions lower input costs for other firms and industries.  Accordingly, the higher levels of productivity will tend to reduce inflationary pressures in the economy and contribe to disinflation (or even deflation).  Clearly, microeconomic reforms assist RBA efforts to achieve its low inflation goal.

Lower prices (or inflation) should encourage greater Investment and Consumption and also increase Australia's international competitiveness, boosting exports and limiting imports.  The combined effect is to increase AD and real GDP - assisting the government's efforts to achieve a strong and sustainable rate of economic growth.

A more internationally competitive economy should result in a higher rate of economic growth over time.  Accordingly, the demand for labour should increase, creating employment and lowering the rate of unemployment.  Whilst this should assist with the achievement of full employment, there are short term (transitional) costs that are faced by an economy in the grip of a heavy microeconomic reform agenda.  In particular, business closures are likely to be higher and organisational restructuring will be commonplace (indeed this restructuring allowed productivity enhancements to occur in the first place). In this environment, unemployment is likely to be higher in the short term, jeopardising the achievement of full employment.  

The government has embarked on its microeconomic reform agenda with the strong conviction that the negative short term impact on unemployment will be reversed in the longer term as a more robust, efficient and competitive economy experiences higher growth rates than would otherwise be the case.  Overall, it is reasonable to argue that microeconomic reforms assist with the achievement of full employment.

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