Supply Side Policy

What is Supply Side Policy?

• Supply side policies are government strategies aimed at improving the productivity and efficiency of an economy to increase its long-run aggregate supply.
• They reduce the constraints on businesses and workers, leading to a higher potential output.
• These policies are often used in combination with demand side policies.

Types of Supply Side Policies

• Labour Market reforms: These aim to make the labour market more flexible. Potential policies could be reducing the power of trade unions, changing employment laws to make hiring and firing easier, and investing in education and training.
• Product Market reforms: Aimed at improving the conditions for businesses to operate. These could include deregulation, privatisation, improving infrastructure, and reducing red tape.
• Fiscal Policy: By offering tax incentives for businesses, the government can encourage investment and innovation.

Advantages of Supply Side Policies

• They increase the potential output and productive capacity of an economy.
• These policies can help reduce inflationary pressures in the long term without causing unemployment.
• By making businesses more efficient and competitive, these policies can also boost the nation’s global competitiveness.

Disadvantages of Supply Side Policies

• Implementation of these policies may lead to greater income inequality since disadvantaged groups might find it harder to get jobs under more flexible employment laws.
• These policies can take a long time to have an effect.
• Some policies, such as deregulation and privatisation, can lead to business failures and job losses in the short term.

Understanding the Laffer Curve and Supply Side Policies

• The Laffer curve is a theoretical representation of the relationship between tax rates and the total tax revenue collected by the government.
• The curve suggests that increasing tax rates beyond a certain point will be counter-productive for raising further tax revenue.
• The elements of supply side policy, such as tax cuts, that are intended to stimulate productive output in the economy, could also be related to the shift of the Laffer curve.

Remember, to successfully revise for the “Implementing Policy” part of your Economics examination, understanding supply side policies in depth is key. This includes knowledge about their purpose, types, advantages and disadvantages, as well as their relation to important economic concepts like the Laffer Curve.