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With your growing understanding of supply and demand factors, you will begin to see that it is possible to predict what the rate of growth might be in the future. Although there are thousands of conditions acting on the economy at any one time, economists are able to use sophisticated models (based on the simple one that you are learning about) to develop some relatively accurate predictions.

This raises the question: If the rate of economic growth is expected to be low, should the government intervene in the market to try and increase it?

Earlier in the year you learned that one of the assumptions of the market mechanism is that there is no government intervention. If the government implements a policy to try and increase the rate of economic growth, then this assumption no longer holds.

Despite the fact that Australia is considered a “free market economy”, we still have a significant level of government intervention. This is justified in three broad ways:


If there was no intervention in the market, then the economy would be more likely to follow the business cycle. This would see us move from very high growth to very low (or negative) growth every ten years.

When growth increases rapidly, the economy could experience inflation. This is undesirable, as it means that those on lower incomes may move towards a situation where their income is not sufficient to meet their basic needs. On the other hand, when economic growth is too low, many people will lose their jobs. People in this situation will find it impossible to maintain their living standard.

To try and avoid this situation, the government will act to “smooth out” the fluctuations in the business cycle.


If left unchecked, it is possible that the benefits of growth could end up being shared by a relatively small group of people. This is also an undesirable situation; when the economy grows, it is important that everyone is able to share in the success.

While this is not a perfect process, the government does act to ensure that those with very low incomes are entitled to receive financial support. This is achieved by taxing those with higher incomes at a higher rate. This money is then used to fund the welfare programs that exist in this country.


We started our study of Economics by saying that it is the study of the way in which we make choices, and the consequences of those choices. If we leave people to make their own choices, then it is possible that some resource allocation decisions would be inefficient.

For example, we want to make sure that there are enough hospitals to treat people when they fall ill. Most people tend to think about paying for health care only when they are sick, but if we operated in that way then the necessary infrastructure wouldn’t exist. We need trained doctors, hospital beds and x-ray machines ready for when the unexpected occurs.

Although there are some private hospitals, the government will also act to provide public facilities. There are many other instances where the market would not supply goods and services in sufficient quantities. For example, the government will ensure that we have schools, a defence force and street lights as well. In this way, it is necessary for the government to intervene in the economy to ensure that resource allocation is efficient.

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