Supply side policies

supply side policies

• aim at positively affecting production side of economy by improving quantity/quality of FOP

• aims to shift LRAS

• 2 categories of SS policies

  • market-based: aim to remove obstructions in free market

  • interventionist: require gov intervention to increase full employment of output

goals of SS policies

• long term economic growth by increasing productive capacity

  • potential national output increases, higher rGDP

• reduce inflation to increase international competitiveness

  • greater supply in economy results in reductions of prices of goods/services, leading to disinflation and more competitive exports

• increase firms incentivise to invest in innovation by lowering costs

• reduce unemployment through labour market flexibility

  • lower wage bills allow firms to recruit more workers

increasing incentives: market based

• reducing income tax rates

  • incentivises workers to work as every hour of work now results in a greater pay, smaller portion of income goes to tax and

• reducing corporate tax

  • incentivises firms to produce more

  • provide firms with extra funds they can use to invest in new tech

• as a result, productivity improves, long term growth increases

improve competition and efficiency: market based

• deregulation:

  • any regulation increases COP for firms and deregulation decreases COP, resulting in greater supply

• privatisation: transfer of ownership of Gov firms to the private sector

  • gov firms are usually so big that private enterprise refrains from trying to compete

  • privatisation encourages new firms to enter market and compete, increasing AS

• anti-monopoly regulation

  • monopoly power = producers can restrict output and increase prices

  • increases competition leading to more efficient allocation of resources

• trade liberalisation

  • reduces trade barriers, increases international trade, increases competition and efficiency

• competition encourages harder work, more efficiency and innovation, lower prices, international competitiveness improves

reduce labour costs and create labour market flexibility: market based

• decreasing trade union power

  • trade unions keep wages above market level

  • without them, wages can be decreased

• decreasing or abolishing minimum wage

  • to lower COP

  • increases employment

• restructuring unemployment benefits

  • to incentivise unemployed to seek work

• wages decrease, COP falls, firms lower selling prices, international competitiveness improves

education and training: interventionist

• increasing gov spending on education and retraining raises quality of workforce by improving skills, productivity improves (PPC shifts outward)

• skills increase, productivity improves, COP of firms fall, firms lower selling prices, international competitiveness

improving quality/quantity/access to healthcare: interventionist

• increasing gov spending on healthcare improves productivity

• human capital improves, productivity improves, COP of firms fall, firms lower prices, international competitiveness

research and development: interventionist

• increased gov spending on innovation increases supply of potential jobs in economy

• new industry emerges, new infrastructure developed, more jobs created, rGDP increases, increase in long term economic growth

provision of infrastructure: interventionist

• increases gov spending on infrastructure (electricity, highways) could help expand capital base of the country in long term, increasing LRAS

• new infrastructure developed, COP decrease, supply increases, firms lower prices, international competitiveness

industrial policies: interventionist

• targeted to support firms in the form of subsidies

• firms receive subsidy, COP decreases, supply increase, firms lower prices, international competitiveness

diagram of SS policies

• successful SS policies will shift LRAS right

  • equal to outward shift of PPC

• e.g efforts to reduce trade union power are successful

• now less protection on wages and wages fall

• firms may higher more workers, quantity of productive labour in economy has increased

  • AP falls from AP1 to AP2

  • Output increased from Yfe to Yfe1

demand side effects of SS policies

• interventionist supply side policies require gov spending on an annual basis for however long it takes to complete the project

• gov spending is a component of AD, so boosts it

supply side effects of fiscal policies

• fiscal policies have ability to improve productive potential of an economy

evaluation of market-based SS policies

• advantages:

  • improved resource allocation

    • increasing productive capacity of an economy requires more efficient uses of its resources

  • no burden on government budget

    • allows market forces to drive efficiency

    • so no associated opp cost

• disadvantages

  • equity issues

    • distribution of income worsens, labour market reforms and wage policies lower workers wages

    • dropping unemployment benefits makes it hard for people with few skills to find jobs

  • time lags

    • significant time lags between seeing benefits

  • vested interests

    • can result in less effective outcomes

    • e.g privatisation resulting in gov’s preferred bidders obtaining an asset

  • environmental impact

    • large infrastructure projects almost always have negative externalities of production

evaluation of interventionist SS policies

• advantages:

  • direct support of sectors important for growth

    • subsidies targeted towards specific industries increase rate of economic growth

      • reduces unemployment

      • can increase levels of exports

  • improvements in SOL

    • increase in quality of education/healthcare raises quality of life for all citizens

  • disadvantages

    • costs

      • expensive to implement and paid for using tax revenue, associated opp cost

    • time lags

      • due to its long term nature, changes in gov results in changes to budgets and priorities which take a long time and end result may not be as effective