1 MICROECONOMIC REFORM VCE ECONOMICS

2 Microeconomic reform refers to government policies which aim to improve the individual sectors of the markets to become more productive and efficient. This process will inevitably involve removing government and regulatory impediments. It will also include encouraging competition throughout the economy to reduce costs. Microeconomic Reform

3 American economist Paul Krugman said: ‘a country’s ability to raise its standard of living over time depends almost entirely on its ability to raise its output per worker’ Productivity

4 Productivity improvements will come from: 1. improved technology 2. education and retraining 3. removing regulatory barriers to trade and commerce so markets can operate more efficiently 4. improved methods of using resources

5 Efficiency Microeconomic reform works by improving the efficiency of the economy’s supply side. There are several meanings to the term efficiency: Productive/technical – largest output per unit input Allocative – resources are allocated to minimum opportunity cost Dynamic – Ability to develop innovation and adapt to change

6 Below are some possible areas of microeconomic reform for an economy: Removing protection – almost all countries have some form of protection for domestic industry, in the form of tariffs, subsidies and quotas. Removing this protection will allow a nation to specialise in its most efficient industries and make best use of its resources. Possible areas of microeconomic reform

7 Deregulation – many countries have regulated industries, for instance airline or financial industries. This may be in the form of limiting the number of companies with the license to provide the service. Removing these regulations will open up the industry to more competition, and encourage companies to lower their cost structure and become more efficient. Possible areas of microeconomic reform

8 Privatisation – Exposing former public enterprises to competitive forces makes these companies more market focused and increases company efficiency. This results in lower prices and better services for consumers. Possible areas of microeconomic reform

9 Labour market reform – linking wage increases with increasing productivity per worker will encourage a more flexible and efficient labour market. Possible areas of microeconomic reform

10 The benefits of microeconomic reform Overall, microeconomic reform will lead to an increase in the level of economic growth and therefore increase the standard of living.

11 The benefits of microeconomic reform Specific benefits which should accrue are: Increase in employment and therefore reductions in unemployment (in the medium to long term) Reduce the level of inflation through increased supply Encourage diversification and promotion of value added products Improve external balance

12 The End