13.2 - Supply side policies

What are supply side policies?

Policies which aim to make markets more competitive and efficient, increase production potential and shift the LRAS curve to the right.

What are supply side improvements?

Reforms undertaken by the private sector to increase productivity so as to reduce costs and to become more efficient and competitive. Supply side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government.

What is different between supply side policy and supply side improvements?

Supply side improvements are undertaken by the private sector itself as a result of entrepreneurs realising they must make their firms more efficient and competitive, whereas supply side policies are part of the means to achieve the desirable outcomes.

What is interventionist supply side policies?

Occurs when the government intervenes in, and sometimes replaces, free markets. Interventionist supply side policies include government funding of research and development.

What are market based supply side policies?

Market-based policies limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used

What are the uses of market based policies?

o To increase incentives

o To promote competition

o To reform the labour market

What are the uses of interventionist policies?

o To promote competition

o To reform the labour market

o To improve skills and quality of the labour force

o To improve infrastructure

What is the Laffer curve?

(page 481) Shows how the government total revenue changes as the average tax return increases from 0% to 100%.

Explain the Laffer curve?

Between the limiting tax rates of 0% and 100%, the Laffer curve shows tax revenue first rising and then falling as the average rate of taxation increases, which in the diagram occurs at an average tax rate of 50%. Beyond this point, any further increase in the average tax rate becomes counterproductive, causing total tax revenue to fall.

Role of supply side policies on the rate of inflation?

Its argued that by reducing businesses costs of production and by reducing monopoly profits through making markets more price competitive, supply side policies reduce cost push inflationary pressures. By enabling productive capacity to grow in line with aggregate demand, successful supply side policies also help reduce demand pull inflation pressures.

Role of supply side policies on balance of payments?

Highly competitive firms, which invest in product design and state of the art technology and methods of production, end up producing high quality goods which customers demand. Taken together, increased price and quality competitiveness give the country a competitive edge, both in domestic and overseas markets. With domestic customers switching to high quality hot produced goods and overseas residents buying more of the country's exports, the country's balance of payments on current account should improve.

Examples of industrial policy measures?

- Privatisation

- Marketisation (or commercialisation)

- Deregulation

- Internal markets

- Subsidising spending on research and development

Examples of labour market measures?

- Lower rates of income tax

- Reducing state welfare benefits relative to average earnings

- Changing employment law to reduce the power of trade unions

- Repealing legislation which limits employer's freedom to employ

- More flexible pension arrangements

- Improving the training of labour

Example of financial and capital market measures?

- Deregulating financial markets

- Encouraging saving

- Promoting entrepreneurship

- Reducing public spending and public sector borrowing