Economics U4 AOS2

AS policies

KK1: why AD policy needs an AS partner

• AD policy: Changes total spending (expenditure), so its main effect is short to medium term

  • With spare capacity: higher AD can life real GDP and employment

  • Near capacity: higher AD is more likely to create demand inflation

  • AS policy: raises productive capacity or lowers costs, allowing more output before inflation accelerates

KK1: the reusable AD-AS casual chain

1. Demand: expansionary policy shifts AD right, raising real GDP and employment but adding price pressure

2. Capacity: successful AS policy lifts productivity or the quantity / quality of resources

3. Costs: Unit production costs fall and firms become more willing and able to supply

4. Outcome: AS shifts right, real GDP rises further with less upward pressure on prices

KK1: time horizon and how it changes the answer (short medium and long term)

• Short term

  • Budget outlays may first increase AD and compete for scarce labour and materials

• Medium term

  • New skills, capital and infrastructure begin to ease bottlenecks

• Long term

  • Productive capacity and potential GDP rise, supporting a faster sustainable growth rate

KK1: how AS and AD policy mix supports the 3 macroeconomic goals

• SSEG

  • Potential output rises and growth can continue that is more sustainable with fewer capacity constraints

• Full employment

  • Higher sustainable output creates jobs; training and matching can lower structural employment (mismatch in labour demand compared to labour supply)

• Low and stable inflation

  • Lower unit costs and greater capacity reduce demand and cost inflation pressure

• Living standards

  • Real incomes and choice can rise, but distributional and environmental effects still matter

KK2: operation of AS policies in improving productivity

• Labour productivity: real output per hour worked.

 

• Higher productivity: more output can be produced from the same inputs, reducing unit costs.

 

• Productive capacity: the maximum sustainable output the economy can produce without rising inflation pressure.

 

• Diagram: a successful policy shifts AS right and increases potential GDP.

KK2: operation of AS policies in efficiency’s

• Allocative: resources move to uses that maximise society's wellbeing.

 

• Productive: output is produced at the lowest feasible cost.

 

• Dynamic: innovation and investment improve products and processes over time.

 

• Intertemporal: resources are balanced fairly and sustainably between present and future.

KK2: operation of AS policies in international competitiveness

• Price competitiveness: lower unit costs allow Australian firms to reduce prices or protect profit margins.

 

• Non-price competitiveness: skills, quality, reliability and innovation can improve export performance.

 

• Macro link: stronger exports and import competition can lift net exports, GDP and employment.

Caution: competitiveness is relative; exchange rates and overseas productivity also matter

KK2 (context): productivity in 2026

Productivity in 2026

 

• Latest result: labour productivity fell 0.6% in the March quarter 2026 and rose only 0.3% over the year.

 

• Why it matters: slow productivity growth constrains supply capacity and sustainable real wage growth.

 

• RBA focus: business investment in technology is critical, but the size and timing of gains are uncertain.

 

• Policy implication: investment, skills, competition and management practices all belong in the AS story.

 

KK3 - education and training as an AS policy

Education and training

• Spending on education and training is vital to improving the skills and knowledge of the current and future labour force

  • Improving the quality of our labour resources

  • Increases the occurrence of innovation

  • Reduces skills shortages/capacity constraints in certain industries

• This funding seeks to boost Australia's technical and dynamic efficiency, lower business costs, and expand our productive capacity

 

Education and training policy

• This involves spending on at all levels of education

  • Early years

  • Primary/secondary education

  • Tertiary

  • Professional education

KK3 - education and training as an AS policy (budgetary policy)

• Policy

  • Government budget outlays lower the private cost of education and expand training supply

• Human capital

  • Workers gain skills, knowledge, adaptability and employability

• Market failure

  • Without support, individuals and firms may underinvest because benefits spill over to the wider economy

• AS focus

  • The strongest effects arrive through labour quality and productivity over time

Example KK3: Free Tafe

• Funding

  • More than 1.6 billion to 2034-25

• Scale

  • At least 100,000 free Tafe and VET places each year from 2027

• Legal base

  • Underpinned by the free TAFE act 2025

• Targeting

  • Priority fields with high national or state demand and cohorts facing barriers to training

• Wider system

  • The national skills agreement provides up to $12.6 billion over 5 years

KK3: Mechanism: skills to aggregate supply

1. Access: lower fees increase enrolment in priority training

2. Skills: successful completion raises the quality of labour resources

3. Productivity: workers produce more per hour and firms fill skill shortages

4. Costs: unit labour costs and capacity constraints ease

5. Outcome: productive capacity and AS rise; competitiveness can improve

KK3: How Tafe being free supports the 3 goals and living standards+equity

• SSEG

  • Higher productivity and fewer bottlenecks lift potential GDP

• Full employment

  • Skills matching reduces structural unemployment and improves participation

• Price stability

  • Greater labour supply in shortage areas can reduce wages and cost pressures

• International competitiveness

  • Lower unit costs and better quality support exporters and import-competing firms

 

Living standards and equity

• Material gains

  • Better employment, incomes and productive capacity can lift purchasing power

• Non-material gains

  • Confidence, social connection, purpose and job satisfaction may improve

• Equity

  • Removing fees can widen access for groups facing financial barriers

• Qualification

  • Benefits depend on course quality, completion and access to suitable jobs