3.7 - Supply Side Policy

• what is supply side policy?

  policies that increases the productive potential of the economy, so the economy can supply more goods and services. they focus on aggregate supply in the economy.
• what do supply side policies do?

  increase the quantity and quality of the factors of production. they often involve in increasing productivity.
• what type of policy are supply side policies?

  micro-economic policies, that increase efficiency and rate of growth of real national output
• what are the supply-side policies?

  • education and training
  • reducing trade union power
  • reducing direct tax
  • reducing welfare benefits
  • improved transport infrastructure
  • privatisation
  • cutting direct tax on firms
  • competition policy
• how does the supply side policy 'education and training' help achieve economic objectives?

  improves workers skills, increases human capital

  increases quality of labour and productivity

  increases economic growth and employment
• how does the supply side policy 'reducing trade union power' help achieve economic objective?

  reduces the number of strikes and industrial disputes leading to higher economic growth
• how does the supply side policy 'reducing direct tax' help achieve economic objective?

  increases incentive to work which increases labour and economic growth
• how does the supply side policy 'reduce welfare benefits' help achieve economic objective?

  increases incentive as reward is lower for not working, increasing labour and economic growth
• how does the supply side policy 'improved transport infrastructure' help achieve economic objective?

  improves mobility of the factors of production leading to economic growth, lower unemployment, and increase UK competitiveness which improves balance of payments
• how does the supply side policy 'privatisation' help achieve economic objectives?

  should increase competition to lead to increased efficiency and output due to the profit motive. this efficiency should lower cost push inflation, the lower prices also increase UK competitiveness and improves balance of payments
• how does the supply side policy 'cutting direct tax on firms' help achieve economic objectives?

  increases firms retained profit and may lead to investment, increasing economic growth and employment. the investments improve UK goods, increases exports, improves the balance of payments
• how does the supply side policy 'competition policy' help achieve economic objectives?

  control monopolies and oligopolies, leading to lower prices and lower overall inflation. this should improve UK competitiveness and balance of payments
• by increasing productive potential, supply side policies help to reduce inflation without causing..?

  unemployment
• supply side policies create growth and employment without increasing...?

  inflation
• what is different about the time length with SSP and DSP?

  DSP take less time to come into effect
• what are the benefits of supply-side policies?

  • lower inflation
  • lower unemployment
  • improved economic growth
  • improved trade
  • improved balance of payments
  • targets specific markets and parts of the economy
• how do supply side policies lower inflation?

  by making economy more efficient, SSP help output rise to keep up with demand and reduce cost-push inflation
• how do supply side policies lower unemployment?

  more output requires more workers, SSP can contribute to reducing structural, frictional and real wage unemployment. higher productivity also increases demand for labour and employment
• how do supply side policies improve economic growth?

  SSP will help make firms and workers more productive which increases the amount of goods and services produced in the economy, this increases economic growth and living standards
• how do supply side policies improve trade and balance of payments?

  by making firms more productive and competitive, UK firms cost decrease, and UK goods and services become cheaper and better quality. UK firms will be able to export more, and this improves balance of payments
• in what way do supply side policies achieve economic objectives better than demand supply policies?

  demand side policies often lead to conflicts in achieving different objectives
• what are the costs of supply side policies?

  • time lags
  • monetary cost
  • opportunity cost
  • opposition to policy
  • equity
  • unintended effects
• why is time lags a cost for supply side policy?

  policies take a long time to become effective so economy condition may change or policies may become unhelpful
• why is monetary cost a cost for supply side policy?

  policies have very high costs which contribute to government debt, resulting in budget deficit
• why is opportunity cost a cost for supply side policy?

  money spent on funding policies could be spent on reducing government debt or improving public services
• why is opposition to policies a cost for supply side policy?

  people's resistance to reduced benefits, trade unions resistance to agreement changes, people resistance to infrastructure for environment etc.
• why is equity a cost for supply side policy?

  has a negative effect on income distribution, impacts the poor the most with reduced benefits / regressive tax
• why is unintended effects a cost for supply side policy?

  cutting income tax may result in people deciding to work less if they're happy with their income, or therefore increased hourly rates. decreased benefits may result in increased crime
• what are examples of time lags?

  infrastructure, education, deregulations
• what are positive evaluation points for SSP?

  • don't increase inflation
  • achieves numerous macro-economic objectives at once

  -> unlike demand side policies
• what are the negative evaluation points for SSP?

  • monetary costs resulting in government debt
  • time lags meaning it takes long time to come into action
• does supply side policy impact aggregate demand or supply?

  supply