Economics: (Chapter 3.7) Supply-Side Policies

Used to affect the supply in the economy.

If total demand rises in the economy but the firms in the economy are not able to supply any more output, then the GDP will not rise but the price will (demand-pull inflation).

Supply-side policies improve an economy’s productive potential and its ability to produce more output, so that when demand rises in the economy it will lead to a higher GDO without inflation being a problem.

The better educated and trained the workforce, the more able it is to produce g/s and, therefore, more supply in the economy.

Many developing countries find that their development is lacking in part due to a shortage of skilled and educated workers. Their governments are unable to find the ressources to put into education, meaning their workforce’s are not very productive.

If there are labour disputes (such as strikes) the output of the economy is lower that unit would otherwise, which costs the economy.

When direct taxation is reduced, it increases the incentive to work and invest, thus enable the economy to increase its supply of g/s.

Acts as incentive for unemployed to join workforce, or existing workers to work harder as the post tax reward will be greater than that received from benefits. For existing workers, they may of been previously discouraged from taking higher paid work as the tax would be higher, as for more work out in, not much more money is received. Causes workers to be reluctant to switch jobs, seek promotion, work harder/longer etc.

If the income that a person gets from working is not much more than the benefits that the person would get from being unemployed, then there is little incentive to work (the unemployment trap).

Furthermore, people already in work may be reluctant to take jobs with higher pay if they lose in-work benefits and pay more tax (poverty tax). Therefore, a generous level of benefits acts as a disincentive for people to work at all or switch jobs. It is argued that incentives will be increased by cutting benefits.

Cuts in corporation tax help both to provide firms with more funds to invest and to increase the incentive to invest.

Cuts in corporation tax also attracts multinational firms to the uk, which increases productivity.

As monopolies can lead to a number of supply-side disadvantages, the government can control monopoly power in a number of ways. It can prohibit mergers that would lead to greater monopoly power and it can force monopolies to see off part of their operation.

Privatisation is the transfer of assets from the public sector to the private sector.

As state-owned businesses are said to be inefficient as they lack the profit motive, privatisation can help increase GDP. As long as privatisation is accompanied by measures to promote competition, there are likely to be efficiency gains and productivity will rise.

A lack of basic infrastructure is a major obstacle to the development of some countries as it makes it difficult for the economy to develop.

Education and training

Reducing the power I’d trade unions in labour markets

Reducing direct taxes on workers

Reducing benefits

Reducing direct taxes on firms

Policies to encourage competition in product

Privatisation

Development of infrastructure

-Time lags. Infrastructure takes long time to construct. Education takes decade for student to entre work force. Benefits of deregulation takes time to see as firms have to become established.

-Cost. Infrastructure is expensive. Provision of education/training is very labour intensive-have to consider wage costs. Opportunity cost.

-Resistance to policies. Some would say reducing benefits would negatively effect most vulnerable in society. Trade unions will oppose to policies reducing their power.

-Equality issues. Negative effect in distribution of income, at least in short term.

-Unintended issues. Some policies have unintended issues.

-Time lags. Infrastructure takes long time to construct. Education takes decade for student to entre work force. Benefits of deregulation takes time to see as firms have to become established.

-Cost. Infrastructure is expensive. Provision of education/training is very labour intensive-have to consider wage costs. Opportunity cost.

-Resistance to policies. Some would say reducing benefits would negatively effect most vulnerable in society. Trade unions will oppose to policies reducing their power.

-Equality issues. Negative effect in distribution of income, at least in short term.

-Unintended issues. Some policies have unintended issues.

-Target. Supply-side policies can target particular parts.

-Combats inflation. Reduces inflation pressure in long term.

-Increases employment. As labour productivity rises, this is likely to lead to a rise in real wages for those workers.

-Increases economic growth. As total supply in the economy rises economic growth has been achieved.

-Improves the balance of payments. As supply-side policies increase competitiveness they will also help improve the balance of payments as a higher quality of resources and rise in productivity should make UK firms more competitive in price and quality, and so help the balance between exports and imports.

Fiscal policy is the use of public expenditure and public revenue to manage on economy.

Fiscal policy is the use of public expenditure and public revenue to manage on economy.

Monetary policy is when the government manipluates prices to increase GDP

Fiscal policy is the use of public expenditure and public revenue to manage on economy.

Monetary policy is when the government manipulates prices to increase demand

Supply-side policies consist of those policies that are designed to create more competition and efficiency in the production of an economy.