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.

1Microeconomics

1.1Competitive Markets: Demand & Suply

1.1.1Markets & Demand

1.1.2Diminishing Marginal Returns

1.1.3Supply

1.1.4Market Equilibrium

1.1.5Price Mechanism

1.1.6Consumer & Producer Surplus

1.1.7IB Multiple Choice - Demand

1.1.8IB Multiple Choice - Supply

1.2Elasticity

1.2.1Elasticities of Demand

1.2.2Factors Affecting Price Elasticity of Demand

1.2.3Elasticity of Supply

1.2.4Price Elasticity of Supply

1.2.5IB Multiple Choice - Price Elasticity of Demand

1.2.6IB Multiple Choice - Price Elasticity of Supply

1.2.7IB Multiple Choice - Other Elasticities

1.3Government Intervention

1.3.1Indirect Taxes & Subsidies

1.3.2Application Question - Taxing Prices or Quantities

1.3.3Subsidies & Price Controls

1.3.4Deadweight Loss & Government Intervention

1.3.5Elasticity & Tax Incidence

1.3.6IB Multiple Choice - Government Intervention

1.4Market Failure

1.4.1Types of Market Failure

1.4.2Introduction to Externalities

1.4.3Negative Externalities

1.4.4Policy for Negative Externalities

1.4.5Positive Externalities

1.4.6The Deadweight Welfare Loss of Externalities

1.4.7Case Study - The Externalities of Education

1.4.8Public Goods & the Free-Rider Problem

1.4.9Asymmetric Information

1.4.10End of Topic Test - Market Failure

1.4.11Application Questions - Market Failure

1.5HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2Macroeconomics

2.1The Level of Overall Economic Activity

2.1.1The Circular Flow of Income

2.1.2Defining GDP

2.1.3Limitations of GDP

2.1.4IB Multiple Choice - Economic Indicators

2.1.5Business Cycles

2.1.6Output Gaps

2.2Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve

2.2.2Components of Aggregate Demand

2.2.3Shape of the Aggregate Demand Curve

2.2.4Shifts in Aggregate Demand

2.2.5IB Multiple Choice - Aggregate Demand

2.2.6Short & Long-Run Aggregate Supply

2.2.7Alternative Models of LRAS

2.2.8Equilibrium in the AD-AS Model

2.2.9Output Gaps & the AD-AS Model

2.3Macroeconomic Objectives

2.3.1Introduction to Unemployment

2.3.2Limitations of Unemployment

2.3.3Types of Unemployment

2.3.4Causes & Impact of Unemployment

2.3.5Defining Inflation

2.3.6Measuring Inflation

2.3.7Use of Index Numbers

2.3.8The Consumer Price Index

2.3.9Consequences of Inflation

2.3.10Causes of Inflation

2.3.11Inflation & Unemployment Tradeoff

2.3.12The Short-Run Phillips Curve

2.3.13The Long-Run Phillips Curve

2.4Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth

2.4.2Determinants of Productivity

2.4.3Economic Growth & Productivity

2.4.4Absolute & Relative Poverty

2.4.5Inequality

2.4.6Inequality 2

2.4.7Lorenz Curve

2.4.8Government Policy on Poverty

2.4.9End of Topic Test - Poverty & Inequality

2.4.10Application - Inequality & Poverty

2.5Fiscal Policy

2.5.1Introduction to Fiscal Policy

2.5.2Fiscal Policy and AD-AS Model

2.5.3Fiscal Policy Lags

2.5.4Automatic Stabilizers

2.5.5IB Multiple Choice - Fiscal Policy

2.6Monetary Policy

2.6.1Objectives of Monetary Policy

2.6.2Monetary Policy Implementation

2.6.3Monetary Policy & AD-AS Model

2.6.4Monetary Policy Lags & Pitfalls

2.7Supply-Side Policies

2.7.1Supply-Side Policies

2.7.2Supply-Side Policies 2

3The Global Economy

3.1International Trade

3.1.1Globalisation

3.1.2Globalisation for LEDCs

3.1.3Globalisation for MEDCs

3.1.4Comparative Advantage & Trade

3.1.5Protectionism

3.1.6Arguments for Protectionism

3.1.7Arguments Against Protectionism

3.1.8End of Topic Test - Globalisation & Trade

3.1.9Case Study - Globalisation & Trade

3.2Exchange Rates

3.2.1Floating Exchange Rates

3.2.2Fixed Exchange Rate

3.2.3Effect of a Stronger & Weaker Dollar

3.3The Balance of Payments

3.3.1Balance of Payments

3.3.2Balance of Payments 2

3.3.3FDI & Reducing a BoP Deficit

3.4Economic Integration

3.4.1Customs Unions & WTO

3.4.2Merged Currency

3.5Terms of Trade

3.5.1Absolute & Comparative Advantage

3.5.2Gains from Trade

3.5.3Terms of Trade

3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6Economic Development

3.6.1Factors Influencing Growth & Development

3.6.2International Institutions

3.6.3Measures of Development

3.6.4Barriers to Development

3.6.5Case Study - The Bottom Billion

3.6.6End of Topic Test - Emerging & Developing

3.7The Role of Domestic & International Factors

3.7.1Interventionist Strategies

3.7.2Development Strategies

3.7.3Development Promotion Policies

3.7.4End of Topic Test - Growth & Global Development

3.7.5Application Questions -Growth & Global Development

3.8The Role of International Trade

3.8.1International Institutions

3.8.2End of Topic Test - Globalisation & Trade

3.9The Role of Foreign Aid

3.9.1Aid

3.9.2Limitations of Aid

3.9.3Support for Aid

3.9.4Application Questions - Developing Countries

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