13.2 Supply Side Policies

What are supply-side policies

Government measures designed to increase long-run productive potential of the economy by improving efficiency and productivity of markets

What are supply-side improvements

Increases in productive potential arising from the private sector without government intervention

Draw effects of a supply-side policy on a diagram

How can tax cuts act as a supply-side policy

They increase incentives for work and investment, boosting productivity and potential output

How does deregulation promote supply-side improvements

It reduces barriers to entry, encouraging competition and innovation, which improves efficiency and productivity

How do education and training policies help achieve supply-side improvements

By improving worker skills and productivity, leading to higher output and economic growth

How does infrastructure spending contribute to supply-side improvements

Improved infrastructure enhances efficiency and connectivity, supporting higher economic output

How do income tax cuts increase potential output

By increasing incentives to work, they may raise labour supply and productivity

How do corporation tax cuts promote economic growth

They encourage investment in capital and innovation, enhancing productive capacity

How do supply-side policies reduce structural unemployment

By improving education, training, and labour market flexibility

How can supply-side policies reduce inflationary pressure

By increasing productive capacity, they shift the LRAS curve right, reducing cost-push inflation and demand-pull inflation

How do supply-side policies affect the current account of the balance of payments

By improving productivity and competitiveness, they can increase exports and reduce the trade deficit

How can education and training reduce the natural rate of unemployment

By increasing employability and reducing skill mismatches in the labour market

What are free market supply side policies

Policies that reduce govt intervention and allow market forces to operate freely (e.g. deregulation and privatisation)

How do tax cuts promote free market supply-side outcomes

By incentivising work, investment and innovation, which boosts productivity

How does deregulation improve economic efficiency

It increases competition and removes unnecessary restrictions on business

What is the role of privatisation in free market supply-side policy

It transfers ownership to the private sector, which may operate more efficiently due to profit motives

How do labour market reforms (e.g., reducing NMW) promote efficiency

The allow wages to be set by supply and demand, potentially increasing employments and flexibility

What are interventionist supply-side policies

Policies where the government actively intervenes to improve economic performance

Why is spending on healthcare considered a supply-side policy?

Healthier workers are more productive, reducing absence and increasing output

How can infrastructure spending improve long-run economic performance

It lowers transport and communication costs, increasing business efficiency and ouptut

How does industrial policy (e.g. subsidies for R&D) support supply-side improvements

It encourages innovation and technological advancement, raising productivity

What are some macroeconomic effects of supply-side policies

Higher potential output, lower unemployment, improved competitiveness and reduce inflationary pressure

What are some microeconomic effects of supply-side policies

Increased efficiency, improved productivity, enhanced competition and better resource allocation