Policy Approach

Definition

Microeconomics is the study of one small sector of the economy. As such, any microeconomic reform is an attempt to implement policy that will have an impact on one sector of the economy, rather than all of the market at once. Both monetary policy and fiscal policy are macroeconomic in nature – the policies that you will study during the last part of Unit 4 will all be microeconomic reforms.

Many students struggle to come to terms with the nature of microeconomic reform. The main reason for this is that there are many different policies that are considered microeconomic in nature. The Study Design calls for you to have an understanding of many different types of reforms, and as such you will need to read widely when learning about this topic. The following pages will provide you with enough basic information to get you started.

In a very basic sense, microeconomic policy is a reform that is implemented in one sector of the economy to improve efficiency. Microeconomic reforms seek to ensure that any gains that are made are able to be sustained into the future, and that the resources necessary to achieve these gains are reasonable. This, in turn, should lead to lower prices, higher levels of output and an improved standard of living for all.

Although the reforms are aimed at specific sectors, the ultimate goal is to achieve an increase in the productive capacity of the economy. In other words, when implementing a microeconomic reform, the government is aiming to shift the aggregate supply curve to the right.

Economists distinguish between four different types of efficiency. You should have learnt about these four types when you were studying efficiency in resource allocation in Unit 3. If you need to refresh your memory, you can do so by clicking here.

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