3.3 SUPPLY SIDE POLICIES
This video is relevant for this section despite it saying that it is for AQA.
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A supply side policy’s aim is to increase the underlying-rate of economic growth. These policies are mainly micro-economic policies that try to make the market more efficient and increase incentives.
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All of the policies that were listed for influencing aggregate supply in the fiscal policy section are supply-side policies. A successful supply-side policy shifts the LRAS curve outwards and is the key to sustained non-inflationary economic growth. You can see from the diagram below that a supply side policy has shift LRAS outwards and this allows a greater level of aggregate demand (AD2 rather than AD1) to be accommodated at the same price.
However, a supply side policy only has a successful effect if it is met by an increase in aggregate demand.
As you can see, a supply side policy by its self has no effect as output stays constant or increases by a little. For the classical diagram, if we assume that the SRAS does not change (probably wont be the case in reality) we see that output does not increase at all in the short run. For the Keynesian view, a supply side policy will increase output slightly but not by the full effect of the supply side increase. You can see the movement in output in the diagram from Y1 to Y2. If an economy has a large output gap then a supply-side policy will have no effect on output at all.
Supply-side Policies
Supply-side policies are the changing of laws and taxation that encourage economic activity. The government spends large sums of money on education both higher education and pre 18 education, and a highly trained work force is a more productive workforce, which means more potential output. Also, the government can change tax laws and welfare reforms to change the incentives for economic agents. Deregulation is another government policy. By decreasing the barrier to entry a market can become more competitive.
Supply-side policies should focus on incentives, technology, mobility, efficiency, enterprise and flexibility. Anything that allows the market to function more freely is a supply-side policy.
Supply-side policies are the changing of laws and taxation that encourage economic activity. The government spends large sums of money on education both higher education and pre 18 education, and a highly trained work force is a more productive workforce, which means more potential output. Also, the government can change tax laws and welfare reforms to change the incentives for economic agents. Deregulation is another government policy. By decreasing the barrier to entry a market can become more competitive.
Supply-side policies should focus on incentives, technology, mobility, efficiency, enterprise and flexibility. Anything that allows the market to function more freely is a supply-side policy.
Supply-Side Policies with Respect to the Four Aims
- Inflation – will be lower as AS shifts to the right. Supply-side policies can also help reduce cost-push inflation as well.
- Unemployment – will also be lower as supply-side polices can help reduce structural and frictional unemployment.
- Economic growth – will be sustainable and increased providing that AD increases as well.
- Balance of payments – will become positive as firms are more competitive.
Supply-Side Policy Vs a Supply-Side Improvement
A supply-side condition is a change in the market affecting supply. For example, a change in a commodity price changes the short run aggregate supply curve. This change does not have any effect on how much an economy can produce. Whereas, a technological advance that improves productivity will increase the amount an economy can produce.
A supply-side condition is a change in the market affecting supply. For example, a change in a commodity price changes the short run aggregate supply curve. This change does not have any effect on how much an economy can produce. Whereas, a technological advance that improves productivity will increase the amount an economy can produce.