10.1 Introduction to microeconomic policies
Innovation: Microeconomics:
the development of a new idea, technology, the study of economic behaviour at the level of the individual units of
device, product or method of production an economy; it focuses on the factors affecting the decisions made by
individuals, firms and governments about the allocation of resources
National Competition Policy: and the prices of goods and services
policy aimed at making markets more
Productivity:
competitive and preventing the abuse of
market power output per unit of input per unit of time
Research and development: Structural change:
investment in technology to increase the capacity of industry-wide changes in the pattern of production that result
firms through the development of new products, in certain products, production processes and even industries
processes and services disappearing while new ones emerge
Supply-side policies:
government initiatives that target individual industries, seeking to improve their competitiveness by improving the
efficiency and productivity of producers; these are also referred to as ‘microeconomic reform policies’
Key Idea:
In the long run, an economy will decline unless it responds to structural change, but microeconomic reforms can remove
barriers to change and promote structural changes that make local industries more productive, efficient and competitive.
10.1.1 The nature and purpose of microeconomic policies
Supply-side policies are government initiatives that promote economic change at the microeconomic level. These reform
policies aim to increase the efficiency of resource allocation and raise productivity levels to allow the production of
increased output from the supply of productive resources available to Australian producers. This makes Australian
industries more internationally competitive and able to produce a greater supply of goods and services and sell them at
lower prices, to meet domestic and export demand. Such economic growth causes national income to rise, puts
downward pressure on inflation and improves the balance of payments.
Microeconomic reforms target specific structural problems on the supply side of domestic markets, which also helps the
Australian economy adjust to emerging structural change at the global level. Microeconomic reforms pursue these goals
by boosting the level of market competition, reducing barriers to production, and creating an environment in which
individuals, firms, governments and industries have incentives to innovate and apply the latest technology and
production methods. Grants for research and development (R&D), taxation incentives and a range of innovation
initiatives have been used. The resource and product markets in both the private and public sectors have been exposed
to increased competitive pressures by deregulation, privatisation of government business enterprises, labour market
reform and the application of competition policy. Other key elements of Australian microeconomic reforms include
increased public and private investment in infrastructure, education and training, and welfare and taxation reform.
,Structural change occurs in an economy over time even if there is no deliberate attempt by government to promote this
through microeconomic reform policies. Changes in the pattern of consumer demand and technological changes drive
structural change, resulting in the emergence of new products, production processes and industries, and the decline of
entire industries. Towards the end of the twentieth century, the services, technology and communications sectors became
central to economic activity in Australia and other advanced economies, while the relative importance of the manufacturing
sector and, to a lesser extent, agriculture declined in importance.
Structural change can be very disruptive to an economy, workers, firms and governments. Whole occupations can disappear,
and even workers who retain their jobs need to acquire new skills and ways of working. Producers may need to develop new
products and production processes that require major changes in capital equipment and the mix of capital and labour used.
Governments may find that their existing policies are impeding the process of structural change. Existing government
regulations and policies relating to the labour market, taxation, industry protection and trade may need to change. An
economy that is slow to adapt to structural changes may find that the global market for its exports declines, or that
consumer spending shifts to imports that are cheaper, are of better quality or meet their changing tastes. In the long run, an
economy will decline unless it responds to structural change.
In an increasingly integrated global economy, change – and the disruption that accompanies it – is unavoidable. Any
economy that is slow to adjust will become less competitive and will experience declining economic growth and external
viability, higher debt and unemployment, along with slower income growth and lower living standards. Even if the Australian
Government can achieve its objectives of economic growth, full employment, price stability and external balance in the
short-to-medium term by using macroeconomic management policies, microeconomic policies need to be simultaneously
employed to promote structural changes that make local industries more productive, efficient and competitive in the long
run. Many of Australia’s recent economic problems have structural causes that cannot be addressed by adjustments to fiscal
and monetary policies
10.1.2 Main areas of supply-side policy reform
Australian governments have pursued reform of the output or supply side of domestic markets using a wide range of
microeconomic policies to complement macroeconomic policy that is primarily focused on managing aggregate demand.
These supply-side policies promote reform of product and factor markets, and target both the private and public sectors. The
impact of microeconomic reforms is felt in both the tradable and non-tradable goods sectors. Some main areas of focus are
set out below.
Investment in infrastructure
The efficiency and competitiveness of Australian producers, and the community’s well-being, depends on the adequacy of
the nation’s infrastructure. Infrastructure is the basic physical and organisational structures and facilities needed for people
to conduct their daily lives, and for producers to access supplies of productive resources and intermediate goods, produce
goods and services, and market and distribute the finished products. Infrastructure can be classified as economic (such as
telecommunications and transport networks, power supplies and financial institutions) or social (for example, schools,
hospitals and public housing), but the categories overlap, especially in the provision of education and training, and law and
order.
Investment in education and training
Investment in education and training is essential to deliver a productive workforce that provides a supply of the specialist
workers needed for existing and emerging production processes and industries. R&D and innovation are vital for firms to
maintain or increase their competitiveness by developing new products and more efficient production processes, and
adjusting to structural changes in local and global markets. Innovations are new ways of doing things and in the economic
realm generally refer to the creation of more effective processes, products and ideas. R&D goes beyond innovation; it
involves an investment in technology and increases the capacity of firms through the development of new products,
processes and services.
, Deregulation and competition policy
Deregulation and competition policy refer to two related strands of microeconomic policy seeking to increase competition
in Australian markets. Deregulation is the removal of government regulations or restrictions, especially in a particular
industry, and is often characterised as ‘cutting red tape’. The National Competition Policy was Australia’s landmark
microeconomic reform program in the 1990s. Its aim was the promotion of microeconomic reform to make markets
operate more competitively.
The Productivity Commission
The Productivity Commission does not implement supply-side policies, but it has become a key part of the nation’s
microeconomic reform agenda, providing analysis, research and policy advice.
Labour market reform
Labour market reform has the potential to increase productivity and improve the competitiveness of Australian producers.
The labour market is a key factor market for almost all productive activity, and outcomes in this market are directly related
to the costs and efficiency of production.
Taxation reform
Taxation reform is an element of macroeconomic policy with direct relevance to the supply side of the economy. Reform
that makes the taxation system more equitable and efficient should strengthen the incentive to participate in the workforce
(increasing the available supply of labour) and work longer hours. Lower or better-targeted taxes can give firms the
incentive to invest in new capital goods that raise productivity, and to expand production, potentially increasing
employment in higher-skill jobs. Any incentives for households to save and businesses to increase investment have positive
implications for the balance of payments, the cost and availability of credit, economic growth and overall living standards.
The taxation system is one of the most direct ways to boost the R&D necessary for structural change.
Reforms in the human services sector
Reforms in the human services sector are aimed at improving outcomes for users and the wider community. The human
services sector covers a diverse range of services, including health, education and community services. The sector plays a
vital role in the well-being of many of the most vulnerable in the population, but is facing significant challenges. These
include increasing demand for services due to the ageing population, the effect of technology and cost increases associated
with new and more complex service provision demands. Reforms are aimed at finding innovative ways to improve the
efficiency and cost-effectiveness of the human services sector, and targeting services to those most in need, to help ensure
that high-quality service provision is affordable for more Australians and leads to improved outcomes for individuals and
the economy. Meeting the demand from low-income consumers for affordable housing is a growing challenge needing an
effective supply-side response. The introduction of the National Disability Insurance Scheme is one of the most significant
reforms in the human services sector ever undertaken in Australia.
Innovation: Microeconomics:
the development of a new idea, technology, the study of economic behaviour at the level of the individual units of
device, product or method of production an economy; it focuses on the factors affecting the decisions made by
individuals, firms and governments about the allocation of resources
National Competition Policy: and the prices of goods and services
policy aimed at making markets more
Productivity:
competitive and preventing the abuse of
market power output per unit of input per unit of time
Research and development: Structural change:
investment in technology to increase the capacity of industry-wide changes in the pattern of production that result
firms through the development of new products, in certain products, production processes and even industries
processes and services disappearing while new ones emerge
Supply-side policies:
government initiatives that target individual industries, seeking to improve their competitiveness by improving the
efficiency and productivity of producers; these are also referred to as ‘microeconomic reform policies’
Key Idea:
In the long run, an economy will decline unless it responds to structural change, but microeconomic reforms can remove
barriers to change and promote structural changes that make local industries more productive, efficient and competitive.
10.1.1 The nature and purpose of microeconomic policies
Supply-side policies are government initiatives that promote economic change at the microeconomic level. These reform
policies aim to increase the efficiency of resource allocation and raise productivity levels to allow the production of
increased output from the supply of productive resources available to Australian producers. This makes Australian
industries more internationally competitive and able to produce a greater supply of goods and services and sell them at
lower prices, to meet domestic and export demand. Such economic growth causes national income to rise, puts
downward pressure on inflation and improves the balance of payments.
Microeconomic reforms target specific structural problems on the supply side of domestic markets, which also helps the
Australian economy adjust to emerging structural change at the global level. Microeconomic reforms pursue these goals
by boosting the level of market competition, reducing barriers to production, and creating an environment in which
individuals, firms, governments and industries have incentives to innovate and apply the latest technology and
production methods. Grants for research and development (R&D), taxation incentives and a range of innovation
initiatives have been used. The resource and product markets in both the private and public sectors have been exposed
to increased competitive pressures by deregulation, privatisation of government business enterprises, labour market
reform and the application of competition policy. Other key elements of Australian microeconomic reforms include
increased public and private investment in infrastructure, education and training, and welfare and taxation reform.
,Structural change occurs in an economy over time even if there is no deliberate attempt by government to promote this
through microeconomic reform policies. Changes in the pattern of consumer demand and technological changes drive
structural change, resulting in the emergence of new products, production processes and industries, and the decline of
entire industries. Towards the end of the twentieth century, the services, technology and communications sectors became
central to economic activity in Australia and other advanced economies, while the relative importance of the manufacturing
sector and, to a lesser extent, agriculture declined in importance.
Structural change can be very disruptive to an economy, workers, firms and governments. Whole occupations can disappear,
and even workers who retain their jobs need to acquire new skills and ways of working. Producers may need to develop new
products and production processes that require major changes in capital equipment and the mix of capital and labour used.
Governments may find that their existing policies are impeding the process of structural change. Existing government
regulations and policies relating to the labour market, taxation, industry protection and trade may need to change. An
economy that is slow to adapt to structural changes may find that the global market for its exports declines, or that
consumer spending shifts to imports that are cheaper, are of better quality or meet their changing tastes. In the long run, an
economy will decline unless it responds to structural change.
In an increasingly integrated global economy, change – and the disruption that accompanies it – is unavoidable. Any
economy that is slow to adjust will become less competitive and will experience declining economic growth and external
viability, higher debt and unemployment, along with slower income growth and lower living standards. Even if the Australian
Government can achieve its objectives of economic growth, full employment, price stability and external balance in the
short-to-medium term by using macroeconomic management policies, microeconomic policies need to be simultaneously
employed to promote structural changes that make local industries more productive, efficient and competitive in the long
run. Many of Australia’s recent economic problems have structural causes that cannot be addressed by adjustments to fiscal
and monetary policies
10.1.2 Main areas of supply-side policy reform
Australian governments have pursued reform of the output or supply side of domestic markets using a wide range of
microeconomic policies to complement macroeconomic policy that is primarily focused on managing aggregate demand.
These supply-side policies promote reform of product and factor markets, and target both the private and public sectors. The
impact of microeconomic reforms is felt in both the tradable and non-tradable goods sectors. Some main areas of focus are
set out below.
Investment in infrastructure
The efficiency and competitiveness of Australian producers, and the community’s well-being, depends on the adequacy of
the nation’s infrastructure. Infrastructure is the basic physical and organisational structures and facilities needed for people
to conduct their daily lives, and for producers to access supplies of productive resources and intermediate goods, produce
goods and services, and market and distribute the finished products. Infrastructure can be classified as economic (such as
telecommunications and transport networks, power supplies and financial institutions) or social (for example, schools,
hospitals and public housing), but the categories overlap, especially in the provision of education and training, and law and
order.
Investment in education and training
Investment in education and training is essential to deliver a productive workforce that provides a supply of the specialist
workers needed for existing and emerging production processes and industries. R&D and innovation are vital for firms to
maintain or increase their competitiveness by developing new products and more efficient production processes, and
adjusting to structural changes in local and global markets. Innovations are new ways of doing things and in the economic
realm generally refer to the creation of more effective processes, products and ideas. R&D goes beyond innovation; it
involves an investment in technology and increases the capacity of firms through the development of new products,
processes and services.
, Deregulation and competition policy
Deregulation and competition policy refer to two related strands of microeconomic policy seeking to increase competition
in Australian markets. Deregulation is the removal of government regulations or restrictions, especially in a particular
industry, and is often characterised as ‘cutting red tape’. The National Competition Policy was Australia’s landmark
microeconomic reform program in the 1990s. Its aim was the promotion of microeconomic reform to make markets
operate more competitively.
The Productivity Commission
The Productivity Commission does not implement supply-side policies, but it has become a key part of the nation’s
microeconomic reform agenda, providing analysis, research and policy advice.
Labour market reform
Labour market reform has the potential to increase productivity and improve the competitiveness of Australian producers.
The labour market is a key factor market for almost all productive activity, and outcomes in this market are directly related
to the costs and efficiency of production.
Taxation reform
Taxation reform is an element of macroeconomic policy with direct relevance to the supply side of the economy. Reform
that makes the taxation system more equitable and efficient should strengthen the incentive to participate in the workforce
(increasing the available supply of labour) and work longer hours. Lower or better-targeted taxes can give firms the
incentive to invest in new capital goods that raise productivity, and to expand production, potentially increasing
employment in higher-skill jobs. Any incentives for households to save and businesses to increase investment have positive
implications for the balance of payments, the cost and availability of credit, economic growth and overall living standards.
The taxation system is one of the most direct ways to boost the R&D necessary for structural change.
Reforms in the human services sector
Reforms in the human services sector are aimed at improving outcomes for users and the wider community. The human
services sector covers a diverse range of services, including health, education and community services. The sector plays a
vital role in the well-being of many of the most vulnerable in the population, but is facing significant challenges. These
include increasing demand for services due to the ageing population, the effect of technology and cost increases associated
with new and more complex service provision demands. Reforms are aimed at finding innovative ways to improve the
efficiency and cost-effectiveness of the human services sector, and targeting services to those most in need, to help ensure
that high-quality service provision is affordable for more Australians and leads to improved outcomes for individuals and
the economy. Meeting the demand from low-income consumers for affordable housing is a growing challenge needing an
effective supply-side response. The introduction of the National Disability Insurance Scheme is one of the most significant
reforms in the human services sector ever undertaken in Australia.
