IB Economics Section 3.7 Supply-Side Policies

supply-side policies

Government policies designed to increase the productive potential of the economy and push the long run aggregate supply curve to the right.

productive capacity

the maximum output that an economy can sustain over a period of time without increasing inflation

competition

Occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.

efficiency

using resources in such a way as to maximize the production of goods and services

productivity

Refers to the quantity of output produced for each hour of work of the working population; for an economy as a whole it can be measured as real GDP divided by the total number of hours worked.

Labor market flexibility

refers to the capacity of the labor force to respond to changes in market conditions, including changes in the demand for labor and the wage rate

international competitiveness

The ability of a nation to compete successfully overseas and to sustain improvements in living standards and output

innovation

An improvement of an existing technological product, system, or method of doing something.

Market-based supply-side policies

Any policy based on promoting well functioning, competitive markets in order to influence the supply-side of the economy, usually to shift the LRAS curve to the right, include labor market reforms, competition policies and incentive-related policies.

deregulation

Policies involving the elimination or reduction of government

regulation of private sector activities, based on the argument that government regulation stifles competition and increases inefficiency

privatization

A transfer of ownership from the public sector (the government) to the private sector, i.e. private owners.

trade liberalization

The policy of liberalizing (freeing up) international trade by eliminating trade protection and barriers to trade (i.e. tariffs, quotas, etc.)

anti-monopoly regulation

Policies that are intended to regulate the market share of an individual company in order to enforce competition.

labor market policies

a set of government measures aimed at influencing the interaction between labor supply and demand, primarily by assisting individuals, particularly those unemployed, to navigate challenges within the job market.

labor unions

An organization formed by workers to strive for better wages and working conditions.

incentive-related policies

a market-based policy which involves using incentives to increase the amount of supply (eg. personal income tax cuts to increase incentive to work, business tax cuts to increase incentive to invest)

Interventionist supply-side policies

Any policy based on government intervention in the market intended to affect the supply-side of the economy, usually to shift the LRAS curve to the right, includes investment spending on infrastructure, education, new technology, and Industrial policies.

research and development (R&D)

is when businesses gather knowledge to create new products or discover new ways to improve their existing products and services.

infrastucture

Numerous types of physical capital resulting from investments, making major contributions to economic growth and development by lowering costs of production and increasing productivity; include power, telecommunications, piped water supplies, sanitation, roads, major dam and canal works for irrigation and drainage, urban transport, ports and airports.

industrial policies

Government policies designed to support the growth of the industrial sector of an economy; may include support for small and medium-sized firms or support for 'infant industries' through tax cuts, grants, low interest loans and other measures, as well as investment in human capital, research and development, or infrastructure development in support of industry.

Long-Run Aggregate Supply (LRAS)

A curve showing the relationship between real GDP produced and the price level when wages (and other resource prices) change to reflect changes in the price level, ceteris paribus. The LRAS curve is vertical at the full employment level of GDP, or potential GDP, indicating that in the long run the economy produces potential GDP, which is independent of the price level.

Investment (I)

The addition of capital stock to the economy or expenditure by firms on capital.