Supply Side Policies

• Supply side policies are policies aimed at improving the productive capacity of an economy by improving the quantity, quality and/ or mobility of one or more of the factors of production
• The aggregate supply (AS) curve indicated the productive capacity of the economy with all resources fully allocated
• Supply side policies aim to lead to a right shift in AS
• Capacity increase within an economy is long run and non inflationary
• Increasing the quantity of production means increasing:

  • number of people active in the labour force
  • availability of natural resources
  • availability of technology
  • increasing the number of firms setting up
• Increasing the quality of production means increasing:

  • productivity of active labour force
  • sophistication of technology
  • enhancement of productive efficiency of firms
• Increasing the mobility of production means increasing the ease at which factors can be deployed where needed
• Occupational mobility is the extent to which workers have skill sets that are in demand
• Geographical mobility is the extent to which labour is located near to where the demand is
• Free market economists argue

  • peak allocative efficiency is best achieved if the market is left to its own devices
  • productive capacity increase is best achieved through the removal or minimisation of government in an economy
  • for minimal taxation
  • for privatisation of markets
  • for minimal regulation of markets
  • for a reduction in the influence of trade unions
• As tax rates increase, the amount of tax revenue generated by government will increase.

  
  

  Once the rate increases beyond A, the revenue received will start to decrease.

  
  

  Excessively high tax rates will:

  • disincentivise business from investing
  • disincentivise workers from working harder to achieve a pay rise
  • incentivise tax avoidance, emigration of skilled labour and firms outsourcing production