4.5-Supply side policy Flashcards
What is Supply side policy?
Measures which are designed to increase aggregate supply and hence the productive potential of the economy.
How is supply side policy achieved?
Increasing the quality or quantity of the factors of production. It can be represented by an outwards shift of the productive possibility curve. More consumer and capital goods can be produced using all resources.
What strategies are used to increase total supply?
Education and training labour market reforms lowering direct tax deregulation, improving incentives to work and invest.
What are the 5 specific supply side policies?
Education and training, Labour market reforms, Lowering direct taxes, Deregulation, improving incentives to work and invest, privatisation
How does investing in education and training achieve supply side policy measures?
Productivity and output go up. There will also be increased members of the labour force, they will have more experience and more geographical mobility, Improve human capital lowering average cost to supply more.
How does lowering direct taxes achieve supply side policy measures?
More supply because less corporation tax. Increased supply and demand because consumers have increased disposable income. workers will work harder higher output increase supply more post tax profit.
How does privatisation achieve supply side policy measures?
More competition and more branches. Higher incentives for the quality of products to be increased, bigger threat of going out of business, lower cost more supply innovate to the customers demand and COP goes down.
How does Subsidies achieve supply side policy measures?
Subsidies is money that is given to producers to incentivise production. Public services industries that provide good competition lower COP increased supply.
How does Deregulation achieve supply side policy measures?
Removal of boundaries for setting up businesses regulation a barrier to entry more business so more employment more invested into economy
How does Labour market reforms achieve supply side policy measures?
Trade unions invest in members often in training and educating them which makes them more productive however too much trade union involvement can lead to increased wages on workers and less strikes
What are the strengths of supply side policy?
They increase the rate of growth of an economy
They reduce inflation
They often reduce unemployment
They often increase the value of net exports as an increase in total supply usually results in lower prices leading to greater exports
What are the weaknesses of supply side policy
The distribution of income worsens as labour market reforms & wage policies lower worker’s wages
They are expensive to implement
There are significant time lags between government expenditure & seeing the benefits e.g. education & training often take a long time
Due to the long-term nature, changes in government often result in changes to budgets & scope of projects
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
What are the draw backs of investing in education and training
Less people employed as there are more people with high labour skills.
There is a long time lag between investment and productive potential
Opportunity cost could be invested into other public goods and services
What are the draw backs of lowering direct taxes
Less tax revenue.
some workers may respond to a cut in income tax by working fewer hours reduces productivity
Firms need to have confidence in the economy to reinvest in their profits
What are the drawbacks of privatisation
Private sector firms less likely to take in consideration the social cost involved with production
Monopoly power could still begin to develop
