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Supply Side Policies - A-

Level Economics

Supply Side Policies

Supply--side policies are policies to

increase the quantity firms are willing to
supply at any given price level. This can be
achieved by an increase in the quantity and
quality of resources in order to raise the
productive capacity of an economy and shift
out the LRAS curve.

These policies aim to:

Improve competition and efficiency in

product markets

Improve competition and productivity in

labour markets

Provide incentives for firms to produce and

invest

Provide incentives for people to work

Increase the geographical and

occupational mobility of labour

Examples of Supply--Side Policies: Labour

Market

Education and Training

How it Works

This policy involves encouraging provision of

education and training. The government can
achieve this in several ways-- for example
they might subsidise firms to train their
workers.

Improved Provision of Training and Education

Increased opportunities and incentives for

workers

Increase in quality and productivity of

workforce

Increase in occupational mobility fall in

structural unemployment

Therefore there will be an improvement in

quantity (supply) and quality (productivity)
of labour-- the LRAS curve shifts outwards.

Evaluation

Time Lags

There will be time lags between initial

investment and the benefits. For example, if
the government invested in the building of a
new university, it would take many years for it
to be built.

Opportunity Cost of Government

Spending

The government could have spent the

money on healthcare, on reducing taxes or
reducing borrowing.

Short Run vs. Long Run

In the SR, the supply of labour might fall as

workers go into training. In the LR, there will
be more skilled workers.

Subject Field

The effect of education will be very limited if it

leads to an increase in people taking
insignificant courses such as Surf Science.

Reduction in Income Tax

How it Works

Lower Rate of Income Tax

Increased incentive to work because there is

more disposable income available from
working

Increased opportunity cost of not working

Increase in supply of labour

Evaluation

Wage Rate

The increase in supply of labour might

decrease the wage rate, which has the
opposite effect

Loss of Government Tax Revenue

There will be a reduction in tax revenue, so

there may be less money to be spent in
improving the productive capacity elsewhere
in the economy (e.g. through improved
education)

Availability of Jobs

There might not be enough jobs available to

accommodate the increase in supply of
labour, so there might be high
unemployment levels

Top Tax Rate?

The effect depends on which tax rate is cut--

cutting the top tax rate will only affect a few
wealthy people who are likely to already be
in work. An increase in the lower tax rate will
incentivise inactive people to seek a job.

Size of Tax Cut

The magnitude of the tax cut determines the

extent of its effect.

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Reduction in Corporation Tax

How it Works

Lower Rate of Corporation Tax

Increase in retained profits for firms

Investment increases

Capital stock increases

Increase in quantity/ quality of capital

Evaluation

Firms might Save

Firms might not invest, but save instead.

Mechanical Labour

Investment might lead to machinery

replacing human labour, so there might be a
fall in unemployment. This will not affect the
shift in the AS curve, but it has negative
effects for the economy

Size of Tax

The magnitude of the tax cut determines the

extent of its effect. The cut has to be large
compared to the costs of capital stock to
encourage firms to invest.

Loss of Government Tax Revenue

There will be a reduction in tax revenue, so

there may be less money to be spent in
improving the productive capacity elsewhere
in the economy (e.g. through improved
education)

Time Lag

There will be a time lag between the tax cut,

investment, and the increase in productive
capacity

Reduction in Benefits, NMW,

Trade Union Rights

How it Works

Lowering the benefits that unemployed

people receive, will give people an incentive
to work, increasing supply of labour.
Moreover, all of these schemes provide a
‘safety--net’ to workers, but by removing
these workers will be more willing to accept
lower wages. This leads to a fall in production
costs and also might lead to firms hiring
more workers.

Evaluation

Fall in AD

The fall in government spending and

consumption will lead to a fall in AD,
exacerbated by the multiplier.

Availability of Jobs

There might not be enough jobs available to

accommodate the increase in supply of
labour, so there might be high
unemployment levels

Necessary Skill Set

These unemployed people coming into the

market might not have the necessary skill set
required to work

Increasing Level of Inequality

The cut in benefits increases the gap

between wealthier, employed people and
poorer, unemployed people. Also, NMW, trade
unions and benefits are all designed to help
poorer people on lower incomes. By
removing these people might suffer and slip
into poverty.

Improved Information on Job

Vacancies

How it Works

An increase in information about job

vacancies will reduce frictional
unemployment.

An increase in information about job

vacancies around the country will increase
geographical mobility.

Evaluation

Insignificant

Frictional unemployment is relatively small

and insignificant.

General Evaluation

Other policies might be more effective-- e.g.

cutting interest rates

The scope for further supply side policies is

limited

Supply--side policies involves cutting taxes

and increasing government spending,
which effectively means that the economy
will be running an expansionary fiscal policy.
This might conflict with what is best for the
economy given its current fiscal position.

If the AD in the economy is at point C in the

diagram, a shift in the LRAS curve will have
little effect. One could argue that
investment should be concentrated on
boosting AD instead of LRAS.

Supply Side Policies- A-Level Economics

Examples of Supply--Side
Policies: Product Market

There are many supply--side policies which

aim to increase competition. Competition
between firms means that firms have to
either cut costs, improve quality of goods, or
produce new goods in order to survive in the
market. Moreover, competition reduces the
possibility of a monopoly firm having power
over the whole market. For example,
monopoly firms can restrict output and raise
price by using their power in the market.

Increasing competition reduces the power

these firms have.

Privatisation

Privatisation is the selling of state--owned

assets to the private sector.

The privatisation of various large former

state--run industries
(telecommunications, electricity, water,
steel, gas, rail etc.) in the 1990s was
designed to break up the state
monopolies to create more competition.

Evaluation: Government ownership may be

beneficial in circumstances where there is a
high risk of market failure. Also, there is little
scope left for privatization in the UK economy
because privatization has already occurred
greatly in the 1990s.

Deregulation

Deregulation involves removing government

legislation in order to remove barriers to
competition.

Deregulation limits government intervention

in the market. This should lead to an increase
in competition and hence a fall in prices,
improvement in quality and an increase in
innovation. Deregulation occurs when the
government pulls back from the industry a
bit, therefore loosening its grip on particular
rules and regulations.

Every industry has government regulations

that it must abide by. Regulations are often
viewed as barriers for competitors looking to
enter the market. Established firms within the
market will oppose deregulation becomes it
makes rules more relaxed for competitors.

The purpose of deregulation is to allow a

particular industry to have greater
competition, create a freer marketplace.
When industries become deregulated it gives
the firms in the market greater leeway in
which to improve their products, craft their
brand and, ultimately, appeal more to
consumers

For example, deregulation in the phone

industry has lead to improved standards in
term of price levels and customer service.
However, increased competition in other
areas, such as the NHS, has just lead to
increased management costs rather than
improved efficiency.

Evaluation: Regulation may be beneficial in

circumstances where there is a high risk of
market failure.

Other Policies: Other policies include cutting

bureaucracy, control of power of monopolies
and reduction in planning restrictions

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→ What are supply side policies?

Supply side policies are government

policies that aim to increase the
productivity and efficiency of the
economy by promoting incentives to
work, invest, innovate, and produce.
These policies focus on the supply side of
the economy, aiming to increase the
quantity and quality of goods and
services produced.

→ What are some examples of supply

side policies?

Examples of supply side policies include

reducing taxes on businesses and
individuals, reducing regulation and
bureaucracy, investing in education and
training, promoting free trade, and
encouraging research and development.

→ How do supply side policies impact

economic growth?

Supply side policies can increase

economic growth by promoting
productivity and efficiency. By reducing
the costs of production and increasing
incentives to work and invest, businesses
can expand output and profits. This can
lead to higher economic growth rates
over the long term.

→ Do supply side policies always lead to

economic growth?

No, supply side policies are not a

guaranteed way to achieve economic
growth. The effectiveness of these
policies depends on a number of factors,
including the state of the economy, the
type of policies implemented, and the
level of competition in the market.

→ What are the advantages of supply

side policies?

The advantages of supply side policies

include increased productivity, efficiency,
and economic growth. These policies can
also lead to lower inflation, reduced
unemployment, and improved standards
of living.

→ What are the disadvantages of supply

side policies?

The disadvantages of supply side

policies include the potential for
increased income inequality, the
possibility of creating negative
externalities such as environmental
degradation, and the risk of reducing
government revenue through tax cuts.

→ How do supply side policies impact

inflation?

Supply side policies can have a positive

impact on inflation by reducing the costs
of production and increasing
productivity. This can lead to lower prices
for goods and services, which can help to
reduce inflationary pressures in the