MircoEconomic Policy Essay Research Paper Contemporary Microeconomic

Mirco-Economic Policy Essay, Research Paper

Contemporary Microeconomic Management

Objectives of Government Microeconomic Policy

In this subtopic the rationale for government involvement in setting microeconomic policy is examined. The interaction between microeconomic performance and Australia’s economic performance in global terms is reviewed and the concepts of economic efficiency are revisited.

Since the early 1980’s, Government microeconomic policy has been directed towards establishing an environment or a framework within the economy, which is likely to result in competitive outcomes. Why is competition so desirable. What are the benefits of competition that Governments in recent years have been so intent on delivering. Being competitive means being able to produce goods and services that customers want, at a price and quality at least as good as producers in other countries. By being competitive and improving productivity, (the ability to produce more output with the same or less amounts of input) a country such as Australia can achieve economic growth and improve the living standards of it population.

Economic efficiency is an important concept in assessing the level of competition in the economy. There are three measures of efficiency, productive or technical, allocative and dynamic efficiency. Productive or technical efficiency is the ability of firms to use the minimum inputs to achieve a particular level of output. This obviously requires choosing the appropriate level of technology and machinery, good management practices and work procedures and elimination of wastage. Allocative efficiency is achieved when firms produce the mix of goods or services most desired by consumers. That is resources are allocated to industries and firms in accordance with how much consumers want the output they produce. Firms can achieve allocative efficiency by producing up to the point that price is equal to the cost of producing the last unit of the good. Dynamic efficiency is having organisational structures that can ensure that efficiency is achieved over time. That is technological improvements are adopted, and innovations made that ensure that firms and industries can rapidly adapt to changing market conditions.

To achieve efficiency within a firm or sector, both productive and allocative efficiency must be present. There is no use having resources properly allocated between firms and sectors and then producing the output inefficiently. Neither is it useful to produce goods at least cost and then find that there is no demand for them. Achieving dynamic efficiency may involve some trade off with allocative efficiency.

In the move towards a more efficient and competitive economy Australia has undergone significant structural change. That is the type of goods and services Australia produces now are significantly different from what was produced in the 1950’s and 1960’s. This has also involved a changing pattern of trade. The relative importance of each sector as a proportion of GDP can be found in the ABS catalogue.

The Efficient Operations of Markets

Market Structures

The model of perfect competition has long been used as the benchmark or yardstick by which the efficiency of other market structures has been measured. The stringent assumptions of the model, such as the existence of many small firms producing an identical product and with free entry and exit mean that it is generally not found in reality. Both productive and allocative

efficiency are achieved in this form of market structure as the existence of many competitors ensures that production takes place at least cost and prices are driven down to the level where they equal marginal costs.

Most goods in Australia are produced in markets that are either imperfectly competitive or oligopolistic in structure. Most service industries and the tourism sector are imperfectly competitive with the number of firms meaning that monopoly profits are unlikely in the long run. In contrast to perfect markets, competition takes place in many ways apart from price. Service, quality and consumers perceptions of image are important.

The bulk of manufacturing industries operate in an oligopolistic market structure due to the high barriers of entry often generated by significant economies of scale. Food retailing, car manufacture, newspapers and brewing are industries characterised in Australia by a few large producers. These industries tend to enjoy the existence of monopoly profits as they are protected against entry of competitors. Non-price competition, such as branding is important in this type of market structure.

So how can efficiency be achieved when the two dominant market structures in Australia do not necessarily deliver these benefits. The theory of contestable markets asserts that the benefits of efficiency can be achieved even if the number of firms in the industry is small. A perfectly contestable market is one which allows easy entry and exit of potential competitors without loss of any of the investment needed to enter the market. This implies that there are no sunken costs in the industry. Assets must be easily transferred to other uses, or there must be an active secondhand market. Existing firms, aware of the threat of entry from other firms, will set prices so that no monopoly profits are earned. In additi