supply side policies

objectives of supply side policies

M-mobility

E-enterprise - encouraging the expansion and start-up of new businesses will help to meet enterprise objectives

E-efficiency - increasing geographical and occupational mobility of labour will help reduce the rate of unemployment

T-technology - investment into research and development aid in technological advancements, promoting competition

I-incentives -Improving incentives to work and invest in people's skills can reduce unit labour costs using higher productivity

F-flexibility

What are supply-side policies

are government attempts to increase productivity and increase efficiency in the economy. If successful, they will shift aggregate supply (AS) to the right and enable higher economic growth in the long-run.

what are the two types of supply-side polices

free market (private sector)

interventionist

free market (private sector)

aims to increase efficiency by removing things that interfere with the free market

government steps away from economy, fewer taxes easier for AS

increase competitiveness and free-market efficiency.

For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions.

Interventionist policy

involve government intervention to overcome market failure can have positive long-term supply-side effect o economic performance

For example, higher government spending on transport, education and communication.

effect on inflation when AS shifts rightwards

Lower Inflation

Shifting AS to the right will cause a lower price level. By making the economy more efficient, supply-side policies will help reduce cost-push inflation. For example, if privatisation leads to more efficiency it can lead to lower prices.

effect on unemployment when AS shifts rightwards

Supply-side policies can contribute to reducing structural, frictional and real wage unemployment and therefore help reduce the natural rate of unemployment.

effect on economics growth when AS shifts rightwards

Supply-side policies will increase the sustainable rate of economic growth by increasing LRAS; this enables a higher rate of economic growth without causing inflation.

effect on trade and balance of payements when AS shifts rightwards

By making firms more productive and competitive, they will be able to export more. This is important in light of the increased competition from an increasingly globalised marketplace.

characteristics of free market supply side policy

cutting government spending and borrowing

lower business taxes to stimulate capital investment

improving flexibility of the labour market

opening up an economy to overseas trade and investment

opening up an economy to inward skilled labour migration

characteristic of interventionist supply side policy

state investments in public services and critical infrastructures

a minimum or living wage to improve work incentives and productivity in the labour market

regional policy to inject extra demand into under-performing areas a persistently high unemployment

higher taxes on wealthy to fund public and merit goods

free market orientated

privatisation means state owned assets to private sector improves incentives deregulation allows new firms to enter market and opens monopolies to competition

income tax cuts means greater incentive to work longer hours

removing regulations and red tape makes it easier to build new factories and housing

flexible labour markets reduces power of trade uniforms minimum wages and regulations

free trade agreements reduced tariff barriers and other obstacles to trade reducing welfare benefits increases incentives to get jobs

supply side challenges for uk economy

high rates of youth unemployment

has less efficient infrastructure

rise of emerging nations

reasons for the lack of productivity in the uk

low rate of capital investment

relatively low levels of market competition

banking crisis affecting lending to businesses

possible slowing rates of innovation due to low AD and high spare capacity

economic advantages of higher productivity

lower unit costs - lower prices=higher demand=increased output=higher employment

improved competitiveness and trade performance

higher wages- businesses can afford higher wages when workers are more efficient

economic growth- if an economy can raise productivity, trend growth of national output can pick up

productivity improvements- labour can be released from one industry and be made available for another

higher profits - efficiency gains can be reinvested

Interventionist

Public sector investment in infrastructure will improve transport and reduce costs increase education funding to schools and universities to improve their labour productivity

vocational training or government schemes to provide new skills to those who lose jobs

increased supply of council housing to improve geographical mobility

public spending on health can reduce hours lost to ill health

evaluate the impact of supply side policies

Limitations of supply side policy long time lags especially when trying to achieve structural changes

level of aggregate demand is to learn for making business investment and innovation viable

some policies e.g cutting higher rate income taxes may lead to greater inequalities of of income and wealth

risk of government failure

looks to achieve relative improvements EG in productivity but other countries will be making gains too