Resource Allocation

Supply Factors Affecting Australia’s Efficiency in Resource Allocation

Supply factors are far more significant than demand factors when we are considering the impact that certain events will have on our ability to allocate our resources efficiently. If you think about this for a moment it is logical – supply factors are those things that affect the ability and willingness of producers to supply a good or service at a given price. We also know that supply factors can be grouped under three broad headings:

Costs of production
Availability of resources
Productivity

As a result of this, it is clear to see that any improvement in supply side conditions will equate to an improvement in our ability to achieve efficiency in resource allocation.

For example, imagine that the farming sector of the Australian economy experienced a drought. This would affect the availability of productive land resources, and it is likely that levels of production would decline. We could also say that our land resources are not being allocated efficiently (although it is true that in this case it is due to circumstances beyond our control).

On the other hand, if a firm decides to implement a new training program to make all of the employees more productive, this will have a positive effect on resource allocation. In this case we would see an improvement in the level of productivity achievable by this firm, and therefore we can say that the labour resource is being allocated in a more efficient way after the training.

We can use a supply and demand graph to illustrate this situation:

In this case we can see that a shift in the supply curve from S to S1 has resulted in a higher quantity (Q to Q1) and a lower price (P to P1). As a result, we can conclude that any factor that will lead to an increase in aggregate supply will also lead to a more efficient allocation of resources.

Perhaps the most important factor associated with Australia’s recent strong performance in regards to efficiency has been the introduction of new technology. Australian companies have been amongst the most innovative in the world as new technologies have been introduced. This has allowed for the restructuring of many businesses, most of which has occurred due to initiatives from within the individual businesses. Whilst this has resulted in some structural unemployment in the short term, it has also provided the necessary framework in which to achieve strong improvements in efficiency.

It should be noted at this stage that the process of improving supply side conditions in Australia is seen as a medium to long term solution for improving the allocation of resources. For example, the extensive microeconomic reform process that has been undertaken in Australia during the last 20 years has, in some cases, resulted in short term increases in unemployment. When the telecommunications industry was deregulated and Telstra was partly privatised, many people lost their jobs. Clearly this does not lead to an improvement in the way that labour resources are allocated!

However, it is believed that in the long term we will have higher quality goods and services in this sector, and also lower prices. Since the mid-1990’s, this is exactly what we witnessed in the Australian economy. The ultimate result has been that many new companies have entered the market, and as a result many new jobs were created. With a net increase in the number of jobs in that sector, lower prices for consumers and more services available, we can conclude that resources are now being allocated more efficiently in regards to telecommunications.

On the other hand, we can also conclude that any factor resulting in a decrease in aggregate supply will lead to lower levels of efficiency in resource allocation. When aggregate supply falls there will be upward pressure on prices, and a possibility that some jobs will be at risk. Therefore, any supply factors that lead to an increase in cost inflation or an increase in the rate of unemployment will also affect our ability to allocate our resources efficiently.

You can examine the supply factors that have an impact on Australia’s rate of unemployment by clicking here.

You can examine the supply factors that have an impact on Australia’s rate of inflation by clicking here.

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