4.2.5.2 Supply Side Policies

expectations, monetary/fiscal policy, supply of credit, and household wealth, as well as global events

Other factors that shift AD include changes in:

changes in unit labour costs and other production costs, commodity prices, exchange rates, gov. tax and subsidies, price of imports

Other factors that shift AS include:

change in FofP costs

what shifts SRAS curve

change in FofP quality/quantity

what shifts LRAS curve

Supply-side improvements

Actual increases in the economy’s productive potential, which may result from policies OR naturally from market forces or private sector actions.

tech firm develops AI that boosts productivity, firms invest in more efficient machinery, improved administration

Application for supply-side improvements

may be independent of gov. action, often driven by private sector, reflects actual results

key features of supply-side improvements

supply-side policies

Deliberate actions taken by the government to increase the productive capacity (LRAS) of the economy.

tax cuts to incentivise, spending on education/training, deregulation, privatisation

application for supply-side policies

Planned and implemented by gov., aim at long term returns, interventionist/market based, takes time to take effect

key features of supply-side policies

classical, keynesian, PPF

How would you show, in a diagram, the use of supply side policy?

misallocation of resources, time lags, lack of private sector response, inefficiency in public services

why may supply-side policies not lead to supply-side improvements?

broad(across entire economy) or targeted(specific sectors of the economy)

supply-side policies can either be:

target supply-side policies

Specific policies aim to reduce the bottlenecks in an economy

bottleneck

slows down the production of a whole economy and means we cannot operate at full capacity.

port is too small, a road network too congested, a broadband network too slow

application for bottleneck

market based, interventionist

two types of supply-side policies

market based

Type of supply-side policy that aims  to remove inefficiencies or lack of incentives by letting the market function by removing barriers to the efficient working of the free market.

interventionist

Type of supply-side policy aimed to correct the market failures, where there is an under-provision of certain goods/services, so the government should act to encourage long term thinking.

efficiency, productivity, incentives to work and invest, labour skills and flexibility

what do supply-side policies focus on

AD/AS diagram: change in LRAS, PPC curve: outward shift

how do you show supply side polices on a diagram