supply-side-policies

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Supply-side Policies

Supply-side policies aim to shift the long-run aggregate supply (LRAS)
There are two categories of supply-side policies
- Interventionist and market-based
Interventionist supply-side policies require direct government intervention to increase the full employment level of output
- These are mainly used to correct market failure
Market-based supply-side policies aim to remove obstructions in the free market that are holding back improvements to the long-run potential
- Setting up a regulator to prevent monopolies forming
- Relaxing employment laws to increase flexibility in the labour market
- Privatising government services through contracting out

Aims of Supply-side Policies

Broadly speaking, there are five aims of supply-side policies
- The overall aim is to increase the quantity/quality of the factors of production
Market-Based and Interventionist Strategies to Meet the Aims of Supply-side Policies

Aim of Supply-side Policy	Market-Based Approach	Interventionist Approach
To increase incentives	Reducing income/corporation tax rates Restructuring the unemployment benefits system to incentivise the unemployed to seek work
To promote competition	Privatisation and deregulation Trade liberalisation	Increased government spending on innovation Direct support to firms (subsidies) promotes international competitiveness
To reform the labour market	Decreasing trade union power so wages can be decreased Decreasing minimum wages to lower costs of production	Increased government spending on improving occupational mobility
To improve the skills and quality of the labour force		Increasing government spending on education and retraining Increasing government spending on healthcare so that productivity improves
To improve infrastructure		Increased government spending on infrastructure

Examiner Tips and Tricks

MCQs will test your ability to differentiate between market-based and interventionist supply-side policies.

When evaluating supply-side policies in essay responses, demonstrate critical thinking by acknowledging that privatisation has been used for so long that there is little left to privatise, and perhaps a better way forward is to improve competition policy and regulation. Consider areas where privatisation has been less successful and explain why: Network Rail (opens in a new tab)

Remember, the private sector will also be increasing supply in an economy (it is not only up to the government) as they are incentivised to increase their profits.

Diagrams to Illustrate Supply-side Policies

Successful supply-side policies will increase the long-run aggregate supply (LRAS)
- This equates to an increase in the production possibilities of an economy
The successful implementation can be illustrated on either a Classical or Keynesian diagram

Graph illustrating a shift in long-run aggregate supply (LRAS) to the right, affecting average price levels (AP) and real GDP (Y). — **A Classical diagram that illustrates the implementation of successful supply-side policy**

Graph showing shifts in long-run aggregate supply (LRAS) from LRAS1 to LRAS2. Average price level on y-axis; real GDP on x-axis with AD1 curve. — **A Keynesian diagram that illustrates the implementation of successful supply-side policy**

Diagram analysis

E.g. Efforts to reduce trade union power have been successful
- There is now less protection on wage levels
  - Wage levels fall
Firms will now hire more workers and the quantity of productive labour in the economy has increased
- This causes LRAS₁to increase to LRAS₂
  - Output increases from Y_FEto Y_FE1
  - Average price levels fall from AP₁→AP₂

Strengths & Weaknesses of Supply-side Policies

Strengths of supply-side policies

They increase the rate of growth of an economy
They reduce average price levels
They reduce unemployment
They often increase the value of net exports
Improvements in Infrastructure can raise the quality of life for all citizens

Weaknesses of supply-side policy

The distribution of income worsens as labour market reforms and wage policies lower worker’s wages
They are expensive to implement
There are significant time lags between expenditure and seeing the benefits
Due to the long-term nature, changes in government often result in changes to budgets and scope of projects
- The end result may be less effective than it could have been
Vested interests can result in less effective outcomes e.g. There are many examples of privatisation occurring in such a way that the government’s preferred bidders obtained an asset at a knock down price
- Often the preferred bidders were not necessarily the most efficient firms

Economics_A-level_Edexcel

supply-side-policies