Supply-Side Policies

Supply Side Policies

Supply side policies are policies that improve the productive potential / capacity of an economy. They are shown by an outward shift of the long run aggregate supply curve (or of the PPF). Key supply side objectives include:

Improve incentives

Improve incentives for people to find work.

Increase labour and capital productivity

Increase mobility

Increase the occupational and geographical mobility of labour to reduce unemployment.

Increase investment and research

Increase capital investment and research and development spending by firms.

Promote competition

Promote more competition and stimulate a faster pace of invention and innovation.

Promote non-inflationary growth

Provide a platform for sustained non-inflationary growth of an economy.

Free-Market Supply Side Policies

Free-market supply side policies include measures such as tax cuts, privatisation, deregulation, and labour market reforms, such as creating more flexible labour markets by reducing trade union power.

Reducing trade union power

Some argue that trade unions prevent the efficient functioning of labour markets.
Trade union legislation protects workers and helps them negotiate higher wages but may reduce their incentive to work hard because workers have protection against being fired.
Reducing the power of trade unions could allow firms to hire and fire workers and pay more competitive (lower) rates.
Some argue that this would improve the efficiency and productivity of labour and so shift the LRAS out.

Privatisation

Privatisation is the transfer of state sector assets to the private sector.
An example is Royal Mail in 2013.
In theory, the free market and the profit incentive means firms have the incentive to be dynamically and productively efficient. So privatisation leads to a reduction in waste, a better allocation of resources, and causes the LRAS to shift out.
Someone could challenge this though. For example, the NHS has advantages by being a dominant supplier of healthcare with economies of scale.

Deregulation

Deregulation means to reduce the bureaucracy or administration costs or rules of supplying products.
This may allow more firms to supply goods and services more easily, and so should reduce the price of them but also promote competition.
This greater competition should help increase the LRAS.
But deregulation of the financial sector was suggested as one cause of the financial crisis. So policymakers are cautious of deregulating too aggressively.

Income tax cuts

A reduction in income tax would increase the disposable income that workers can earn and incentivise work.
This supply side policy may also attract foreign labour..
All of this will serve to increase both the quality and the quantity of labour, and improve the long-term trend rate of economic growth. We can show this by a shift out of the PPF and the LRAS.
The impact on government tax revenue depends on the loss of tax revenue vs the higher number of people working.

Corporation tax cuts

Lower corporation tax rates would lead to higher post-tax profits.
This would allow more money for firms to finance investment. Investment in R&D (Research & Development) could lead to better quality goods and services being created, shifting the productive capacity and the LRAS right.
But there is no guarantee that firms will spend on it on R&D. It could simply be used to increase dividends to shareholders, which may have a distributional effect.

Interventionist Supply Side Policies

Interventionist supply side policies include measures such as government spending on education and training, industrial policy, subsidising spending on research and development.

Education and training

Governments could spend money make sure their labour force is educated and trained.
They could spend more on university education, literacy and mathematical skills. This would improve occupational mobility of workers as human capital rises.
This should improve productivity and efficiency, which will shift the productive potential of the economy and the LRAS out.
This would also reduce the rate of structural unemployment and so the natural rate of unemployment.

Infrastructure

The government could spend money on infrastructure, with projects such as Crossrail, HS2 rail, super-fast broadband projects and better roads.
This will mean goods and services can be transported quicker around the country, as well as labour. This will reduce costs, improve efficiency and so improve productivity and relative unit labour costs (wages vs productivity) of producing goods and services.
This will improve international competitiveness and shift the LRAS and productive potential out.

Home building

Building more homes would increase supply and so reduce the price of them.
So affordability would improve and workers could move around the UK more to where the jobs are.
This improvement in geographic labour mobility would improve efficiency and so improve the LRAS and productive capacity of the economy.
It would also help to reduce the natural rate of unemployment.

Subsidies

Government subsidies or tax breaks to encourage firms to invest in supply side improvements could be done.
An example would be subsidies for firms if they invest in green energy or improving infrastructure. This would improve efficiency in the long run and shift the LRAS out.

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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