Policy Approach

Aims

Microeconomic reform is predominantly about improving efficiency. However, it is important to understand what this actually means.

When implemented appropriately, a successful microeconomic reform should increase the supply potential of the business or industry that is the focus of the reform. In other words, the supply curve should shift to the right. We can demonstrate this on a supply and demand graph.

From the graph, it is easy to see the impact that these changes should have on each sector of the economy. Once the policy has become effective, we should see a higher level of output, with no upward pressure on prices. This will form the basis of the goals for these types of policy.

Increase the rate of growth: The Australian economy has grown steadily for over ten years. This is due in part to the microeconomic reforms that have been implemented during this time. By increasing the supply potential of each business area, the equilibrium point moves to the right, and the growth potential of the economy is increased.
Remove pressure on prices: Microeconomic reforms are supply side reforms. By aiming to shift the supply curve to the right, not only will the equilibrium point shift right, it will also move down. This means that there should be no upward pressure on prices – the inflation rate should remain low.
Efficiency in resource allocation: Perhaps the major goal of all microeconomic reform policies is the desire to improve the efficiency with which resources are allocated in the Australian economy. If the Australian economy is able to create a higher level of output with a smaller quantity of inputs, then our growth will be sustainable and prices should remain stable.
External stability: If businesses within Australia are more efficient, then it follows that they will be more internationally competitive. This means that our goods and services will be more attractive on the international market, and therefore our exports will increase. This should help to make the CAD stable, and therefore the currency should also benefit.

As you can see, these goals encompass most of the goals that you have studied during Unit 3. In fact, in pursuing microeconomic reforms it is generally believed that the entire Australian economy will benefit, and that we will be more likely to achieve our economic goals in all areas.

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