2.6.3 supply-side policies

What are supply-side policies?

Government policies aimed at increasing the productive potential of the economy and shifting the supply curve to the right.

Can supply-side improvements happen without government intervention?

es, through private sector actions such as investment.

Can supply-side policies target specific markets?

Yes, they can be economy-wide or focused on particular sectors.

What are market-based supply-side policies?

Policies aimed at removing inefficiencies in the free market, such as disincentives to work or invest.

What are interventionist supply-side policies?

Policies aimed at correcting market failure, such as under-provision of education or low investment by firms.

Which economists prefer market-based policies?

Free market economists, as they favor minimal government involvement.

What do economists who support interventionist policies argue?

That markets are not always efficient and need government action to improve performance.

How can the government increase incentives to work?

By reducing benefits or taxes, which raises the opportunity cost of being unemployed.

How does Universal Credit aim to increase employment incentives?

By easing the transition into and out of work.

How can the poverty/unemployment trap be addressed?

By subsidising low-income workers through income tax credits instead of taxing them.

What can be done to encourage certain groups, like women, back to work?

Offer free childcare and flexible working hours.

How can the government increase the incentive for firms to hire?

By reducing employment-related taxes such as National Insurance Contributions.

How might removing the minimum wage affect employment?

It could increase the incentive for firms to hire more workers

How can tax cuts encourage investment and risk-taking?

By increasing post-tax returns, making investment more attractive.

What is a criticism of tax cuts to incentivise work?

Small tax cuts may have little impact on work incentives and can worsen income inequality or increase borrowing.

How does privatisation support supply-side growth?

By moving firms to the private sector, which is believed to be more efficient due to competition.

How does deregulation promote competition?

By removing barriers to entry and reducing restrictions on businesses

What laws underpin UK competition policy?

The Competition Act (1998) and Enterprise Act (2002).

What is the function of the CMA in the UK?

To ensure markets remain competitive and prevent monopolies.

What are potential downsides of privatisation and deregulation?

Lower service quality, environmental harm, and government failure.

How does increasing the retirement age affect supply?

It increases the working population, boosting production capacity.

How has the UK government weakened union power?

By restricting picketing and requiring higher turnout for strike ballots.

How have businesses made the labour market more flexible?

By introducing zero-hour contracts and flexible employment terms.

What policies can improve labour mobility?

Better job vacancy info, flexible pensions, and affordable housing.

How can the minimum wage affect unemployment?

If set above equilibrium, it can lead to real-wage inflexibility unemployment.

How does reducing benefits help labour market reform?

By increasing work incentives and reducing unemployment.

What are criticisms of labour market flexibility reforms?

Lower job security, higher inequality, and reduced AD from benefit cuts.

How does spending on education improve supply?

By creating a more skilled and efficient workforce.

What are some UK education reforms to improve supply-side performance?

T-Levels, free university tuition, and better apprenticeships.

What is the Apprenticeship Levy?

A tax on large firms used for staff training, though its effectiveness is debated.

How can skilled immigration help the labour market?

By addressing skill shortages and filling high-skill vacancies.

What are limitations of increasing education spending?

Potential mismatch with job market needs, opportunity costs, and time lags.

How can investment be incentivised through tax policy?

By offering lower corporation tax or investment relief schemes.

What are some UK policies encouraging private investment?

Corporation tax cuts and the Enterprise Investment Scheme.

What are some examples of UK infrastructure projects?

HS2, CrossRail, and the Transforming Cities Fund.

How does improved infrastructure increase supply?

By enabling more efficient production and promoting investment in technology.

How does the UK rank in infrastructure globally?

24th in the world.

What are some issues with infrastructure investment policies?

Opportunity costs, potential tax evasion, and possible ineffectiveness.

How do supply-side policies differ from demand-side policies?

They aim to increase output and reduce prices/inflation in the long term.

What type of growth do supply-side policies promote?

Long-term economic growth.

How can supply-side policies affect the balance of payments?

By improving export performance.

Why are supply-side policies appealing to different economists?

Because both market-based and interventionist methods are available.

According to the Keynesian LRAS model, when are supply-side policies ineffective?

When LRAS is elastic and demand-side policies are needed.

What are common issues with supply-side policies?

They may fail to increase supply or create new conflicts.

How can supply-side policies affect the government budget?

They may cause deficits due to higher spending or lower taxes.

What undesirable macroeconomic effects can supply-side policies have?

They can raise unemployment or inflation depending on implementation.

What is a limitation of supply-side policies in terms of timing?

They take a long time to influence output.

where to distinguish LRAS and SRAS diagrams?

What is the nature of the change in the question?

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├──> Short-term shock (e.g. oil price, tax, wage rise)?

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| └──> Use SRAS shift diagram (up or down)

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└──> Long-term change or policy (e.g. education, investment, infrastructure)?

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v

Does the question refer to the economy’s productive capacity/LRAS?

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├──> YES → Use LRAS

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| ├──> Economy assumed to be at full employment?

| | |

| | └──> Use Classical LRAS (vertical)

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| └──> Output gap / unemployment mentioned?

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| └──> Use Keynesian LRAS (L-shaped)

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└──> NO → Use AD/AS without LRAS shift (focus on demand instead)

Productive capacity only refers to what?

LRAS, It refers specifically to the maximum output an economy can produce when all resources are fully and efficiently employed. That’s Long-Run Aggregate Supply (LRAS), not SRAS.

examples from previous exam questions that refer to economys productive capacity?

“Evaluate the impact of education spending on long-term growth.”	Increase in productive capacity via skills	LRAS (usually Keynesian)
“Discuss how investment in infrastructure affects the economy’s ability to grow.”	More capital = higher productive potential	LRAS (could use either curve)
“Assess the likely impact of reducing corporation tax on business investment and long-run output.”	More investment = productive capacity rises	Classical LRAS (or mention both short and long run)
“Examine how supply-side policies could reduce unemployment.”	Labour market reforms → higher efficiency	LRAS shift right
“Evaluate the effectiveness of policies to increase potential economic growth.”

• “Increase in potential output”

• “Improve efficiency/productivity”

• “Increase the ability to produce”

• “Supply-side policy effects”

• “Long-run aggregate supply”

• “Expand the economy’s capacity”

• “Raise the trend rate of growth”

• “Remove bottlenecks in production”

• “Reduce structural unemployment”

• “Labour market reforms”