Chapter 28 - Supply side policy

Define supply-side policy

Long term measures to increase the total supply in the economy which leads to an outwards shift on the PPC

What are the 6 supply-side policy measures? (D.E.L.L.I.P)

• Education and training

• Labour market reforms 

• Lower direct taxes 

• Deregulation 

• Improving incentives to work 

• Privatisation 

What are the effects of supply - side policy on government macroeconomics aims  ?

• Economic growth : increase GDP 

• Inflation : more supply, lower prices of goods & services = disinflation 

• Unemployment : decrease as more outputs are produced

• Balance of payments : increase as prices of goods and services decrease due to increased supply, which makes it attractive to foreigners and number of exports are improved 

• Redistribution of income : supply - side policy measures tend to benefit low income earners more than high income earners. 

Explain how a government can use supply-side policy to create incentives for firms to invest in the economy:

Through labour market reforms, the government can reduce minimum wage to lower the cost of production. Firms are also encouraged to hire more workers as it is cheaper. By reducing income tax, firms are able to keep more profit to themselves which creates an incentive for them to work harder and invest in new machineries with extra funds.