2.6.3 Supply side policies

• Supply-side policies


  Aim to improve the long run productive potential of the economy
• Market-based policies


  Limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used.
• Interventionist policies


  Rely on the government intervening in the market
• Market-based policies


  • Reducing income and corporation tax to encourage spending and investment
  • Deregulating or privatising the public sector to promote competition
  • Reducing the NMW (or abolishing it altogether) to reform the labour market
• Interventionist policies


  • A stricter government competition policy to promote competition
  • Subsidising the relocation of workers and improving the availability of job vacancy information to reform the labour market
  • Subsidising training or spending more on education to improve skills and quality of the labour force
  • Spending more on infrastructure such as improving roads and schools
• AD/AS diagrams


  1. LRAS curve shifts to the right to show the increase in the productive potential of the economy

  2. Leads to a fall in the average price level, from P1 to P2

  3. Leads to an increase in national output, from Y1 to Y2
• Strengths of supply-side policies

  They can deal with structural unemployment by directly improving the labour market
• Weaknesses of supply-side policies

  • Significant time lags associated with them
  • Market-based supply-side policies could lead to a more unequal distribution of wealth
• Demand-side policies


  Better at dealing with cyclical unemployment by reducing the size of a negative output gap and shifting the AD curve to the right