VCAA Economics Aggregate supply policies

Although they are limiting immigration, our skilled immigration policy will still improve the quantity and quality of the factors of production, as it brings in (this year) 185,000 permanent migrants, 70% of which are skilled. These skilled migrants bring experiences and qualifications that are currently in shortage, thus they ‘fill a gap’ in our labour market e.g. nurses, engineers. This increases both supply of labour for firms (making them more able to produce) and increases labour productivity (output per worker per hour), as on average they are more proficient. As a result, labour productivity is more likely to outpace wages growth, reducing growth in Real Unit Labour Costs (RULCs), thus lowering per unit costs and overall costs of production for firms, making production more profitable and thus firms more willing and able to produce, increasing AS and productive capacity. This puts downwards pressure on prices and firms can pass on lower production costs as lower prices, reducing cost-inflation, and therefore overall inflation. This should assist in ensuring inflation does not rise above the target, especially after the energy rebate is removed, assisting the achievement of the goal by helping sustain an inflation rate of 2.3% per year on average over time. The government capping the amount of skilled immigration only reduces the positive impacts on AS, not completely removing them. However, since this cap was made in response to concerns over housing affordability, then this may assist the achievement of the goal by reducing population size, and thus limiting demand (and thus shortages) for housing, reducing demand inflation and helping maintain the inflation rate within the target of 2–3%.

The Emissions Trading Scheme (ETS) involves the government issuing carbon credits which allow firms to emit a given volume of CO2. As the government decreases the inelastic supply of carbon credits to meet its environmental objectives, the relative cost of producing carbon-intensive goods and services rises, incentivising resource allocation towards cleaner production methods which are relatively more profitable. In the short term, the ETS may decrease intertemporal efficiency, as the additional costs of production can force inefficient firms to shut down, increasing structural unemployment and thus idle labour resources. This may represent an insufficient quantity of labour resources being allocated towards current production to sustain material living standards through wages, hence representing intertemporal inefficiency. However, in the long term, the ETS should improve intertemporal efficiency by preserving the quantity and quality of natural and common access resources for future generations, ensuring the optimal balance between resources used for current and future production.

Answer(s) could include:

Tariff diagram:

• price – Y axis, quantity – X axis
• tariff originally set to raise price in market and raise government revenue eliminated
• domestic supply falls, imported supply rises
• domestic consumption expands.

Tariff explanation and short-term effects:

• reduction in price for consumers and expansion in domestic consumption
• switches consumption from domestic producers to imports
• decrease the cost for domestic producers if an imported capital item
• domestic suppliers sell less for less
• possible reduction of government revenue from tariff
• reference to DWL and market effects (CS, PS, TS).

Subsidy diagram:

• price – Y axis, quantity – X axis
• supply curve shifts to the left for domestic suppliers (decrease)
• increased gap between local supply and local demand
• price remains at world price
• domestic consumption is unchanged.

Subsidy explanation and short-term effects:

• increased domestic costs as subsidy removed
• lower competitiveness against imports
• decreased domestic production
• imports increase
• reduction of Government subsidy cost.
• reference to DWL and market effects (CS, PS, TS).

Longer term effects of tariff elimination:

• reduction in retaliatory tariffs
• less Government revenue for spending in other areas
• increase in economic output and employment through increased free trade
• structural change in the economy as resources such as labour shift from uncompetitive trade exposed industries to competitive industries
• higher national income.

Longer term effects of subsidy elimination:

• efficient producers are advantaged
• decreased burden on the tax payer
• promotes innovation in the economy
• government expenditure can be re-allocated to more effective areas of social need.

Aggregate supply policies are government initiatives designed to improve supply side conditions and reduce business costs for firms, to ultimately enhance productive capacity and living standards over time. They complement AD policies, which work in the short term to stimulate AD and spending, by ultimately enhancing and increasing the maximum possible level of output/production that can be produced using all available resources (i.e., productive capacity). Training and education spending ultimately improves the quality of human capital, and increases labour productivity such that more output can be produced from each hour of labour worked. Thus, these AS policies work in the longer term, and enable AD policies to stimulate spending, whereby greater levels of AD can be matched with increases in output, without running into excessive demand inflationary pressures from capacity constraints or shortages, due to the expanded productive capacity of the economy. Thus, enabling non-inflationary economic growth over time to be achieved.

An increase in skilled migration means that the inflow of skilled foreign workers into Australia has increased. Their entry is primarily based on their ability to fill a gap in the economy which is created by a skills shortage, their selection and allowance into Australia would have been based on their exceptional skills and knowledge. To the extent that their performed role would otherwise be left unfilled, or by someone with an inferior work skill set, their increased entry boosts the quality of human capital and increases labour productivity, increasing output produced per hour of labour worked. This boosts the overall productivity of the economy, while reducing the costs per unit of output, which thus increases the ability for firms to offer their products at lower prices. This increases the ability of Australia’s tradables sector to compete/match with foreign firms producing the same goods/services, in terms of lower or the same prices, and the same/higher quality, boosting international competitiveness.

The carbon offsets scheme involves voluntary participation by firms, who earn Australian carbon credit units (ACCUs), for the removal of one tonne of carbon dioxide. This creates a market for carbon emissions, whereby firms have an incentive to undertake greater investment in sustainable business practices and to earn ACCUs and sell them back to the government or to other firms for greater revenue. This creates an incentive for firms to adopt the use of more energy efficient materials and substitution to renewable sources of energy. This leads to a reduced current use of fossil fuels by current firms, which leads to more non-renewable energy sources for future generations to use in their production processes, which thus improves the balance of resource use between current and future generations, improving inter-temporal efficiency. Although in the short run, firms may experience increased costs from their intentional adjustment to renewable energy which may cause them increase prices. In the short run, this may reduce material living standards as consumers purchasing power will be eroded. However, in the long run with lower levels of greenhouse gases in the atmosphere, the consequences of climate change will be lower with reduced severity of weather events. This preserves the quantity of natural resources and growth in AS and hence output, improving material standards of living in the long run. In both the short and long run, more sustainable business practices reduces pollutants, improving air quality and thus non-material living standards.