Supply side policies are government attempts to increase productivity and efficiency in the economy

• if successful, they will shift aggregate supply to the right and enable higher economic growth in the long run

• Supply side policies should increase productivity and shift long-run AS to the right

Free market SSP: policies which increase competitiveness and free-market efficiency

• lower income tax rates, reduced power of trade unions

• Privatisation: set state owned assets to private sector, improves incentives

• deregulation: allows new firms to enter the market open monopolies to competition

• income tax cuts: greater incentives to work longer hours

• remove regulations: reduce power of trade unions, minimum wage and regulations

• free trade agreements: reduce tariff barriers and obstacle to trade

• reduce welfare benefits: increase incentive to get a job

  • all these factors improve efficiency and competitiveness by extension

Interventionist SSP: government intervention to overcome market failure

• higher government spending on transport, education, and communication

• government provides capital goods and services where it is believed that the market has failed to provide them.

Benefits of SSP:

1. Lower inflation: shifting AS to the right will cause a lower price level

   • More efficient economy → SSP will reduce cost-push inflation

   • Privatisation leads to more efficiency and lower prices

In deregulation, competition tends to lead to lower prices + better quality of goods and services

• Difficulty: not all industries are amenable to competition. Privatising and deregulation these industries creates a private monopoly who can charge higher prices

• Lower income taxes increases incentive for people to work harder, leading to an increase in labour supply and more output. A cut in corporation tax gives firms more retained profit they can use for investment. (not always the case, incentive isn’t always increased and firms may choose to save profit)

• Labour markets can be regulated through policies such as:

  • make it easier to hire/fire workers

  • reduce maximum working hours and minimum holiday pay

  • enable zero-hour contracts, which allow firms to employ workers when demand is greater

  • flexible working hours decrease productivity

Interventionist SSP: policies which are based on the idea that the government has a fundamental role to play in actively encouraging growth

• Investment in human capital

  • increases productivity through improving education, labour force and training

  • education creates positive externalities

• Research and development

  • economies need to study up-to-date with modern developments to develop new production techniques

  • tax credit: could allow firms to not pay taxes from retained profit spent on R+D

• Provision and maintenance of infrastructure: defined as large scale capital provided by the government

  • necessary for economic activity

  • productive potential of an economy illustrated by LRAS will be imposed by a better infrastructure

    • Direct support for businesses or enterprise

Limitations for Interventionist SSP:

• significant monetary cost involved

• time lags before an outcome is produced

• depends on politics of the country

• supply SP are long run, but when implemented, some will have short run demand side effects

Demand side theory: is built in the idea that economic growth is stimulated through demand

• main goal is to continue consumer spending on products → keep the economy afloat

In market based supply policies, the reduction of household income taxes and corporate taxes will have expansionary fiscal effects

• In interventionist SSP, increased government spending increases AD in the economy and has expansionary fiscal effects