2:5:2 Macroeconomic Objectives And Policies - Supply Side Policies Flashcards
What is meant by the term Supply Side Policies?
Are action taken by the government intended to increase the amount that firms are willing to supply at any given price level.
What is the objective of Supply Side Policies?
- Improve the supply of the economy (productivity, availability of resources, removing regulations and just reducing cost in general) - Seek to shift AS to the right
Which curve do Supply Side Policies effect?
Aggregate Supply Curve (AS)
What are the 2 approaches to supply side policies?
- Effectiveness of markets ( allowing more flexibility as determined by supply and demand) - Interventionist Approach (Governments getting involved in markets to reduce market deficiencies)
Why are Market Based Supply Side Policies effective?
- Increasing price Flexibility and Signalling In the Market (if Price is not used to allocate resources effectively, there will be surpluses and deficits in the market) - Increasing Competition (Increasing competitions means firms have to cut costs or become more innovative in order to survive) - Improving Incentives (Incentives function by giving people higher rewards for what they do and therefore motivating them to work harder)
Why are Interventionist methods of Supply Side Policy Effective?
- Improving Education and Training ( Increase Spending in Education and using subsidies to incentivise firms to take on apprentices, however it’s expensive and time lags) - Improving health and introducing performance related pay (Long term policies that encourage firms to produce more at any given price level) - Implementing Regulations - Improving Infrastructure
What is meant by the term infrastructure?
The physical and organisational framework need for an economy to operate efficiently
Disadvantages of Supply Side Policies.
- If there is demand deficient unemployment then the supply side policies could have no affect at all - Time lags, Policies such as education can take many year to have an effect on production costs - No opportunity for increased competition
In the short run how does Investment education affect production costs?
Because there are fewer people in the labour market
How can Supply Side Policies cause Poverty and Inequality?
- By cutting out of work benefits such as Jobseekers Allowance when there are no jobs available or the persons skill set doesn’t match the job requirements, then there I wider income distribution and no effect on the labour market - Cuts In the National Minimum Wage - Reducing the power of trade unions
What is meant by a trade union?
Organisations of workers that exist to promote the welfare of their members
What side effects do Supply Side Policies have on the Demand Side?e
- Cutting taxes has fiscal policy implications - Cutting Minimum real wages & Reducing the power of trade unions affects low income earners disproportionality
What effect does effective Supply Side Policies have on Inflation and Economic Growth?
Lowers inflation Higher rates of economic growth
Demand Side Policies shift the [….] curve
Aggregate Demand (AD) curve
Supply Side Policies are used to increase the […..] curve
Aggregate Supply (AS)
What is the aim of Supply Side Policies on an economy?
Influence individuals and firms to become more productive, cutting costs, improving incentives and increasing competitiveness, thereby being able to produce more at lower prices
What is meant by the term Free-Market Supply Side Policies?
Policies to increase competitiveness and competition
What is meant by the term Interventionist Supply Side Policies?
Government intervention to overcome market failure
How does Supply Side Policies Lower Inflation?
- Shifting AS level to the right will cause a lower price level - By making the economy more efficient, Supply-Side Policies will help reduce cost push inflation
How do Supply-Side Policies cause Lower Unemployment?
- Help reduce structural, frictional and real wage unemployment.
How does Supply-Side Policies improve economic growth?
- Increase Economic Growth By Increasing LRAS - Enables a higher rate of economic growth without causing inflation
How do Supply-Side Policies improve trade and the Balance of Payments?
- By making firms more productive and competitive, they will be able to export more.
Examples of Free Market Supply-Side Policies.
- Privatisation - Deregulation - Income Tax Cuts - Remove Red Tape - Flexible Labour Markets - Free-Trade agreements - Reduce Welfare Benefits
Free market Supply-Side Policies - Privatisation
- Sell State owned assets to the private sector - Argued that the private sector is more efficient as they have a profit motive to reduce costs and develop better services
Free market Supply-Side Policies - Deregulation
- Allow new firms to enter a market, will make the market more competitive - Open monopolies to competition - Competition tends to lower prices and better quality of goods/services
Free market Supply-Side Policies - Income Tax Cuts
- Greater incentive to work longer hours - Leading to an increase in the labour supply and more output - Cut In corporation tax gives firms more Retained profits to use for investment
Free market Supply-Side Policies - Remove Red Tape
- Make it easier to build new factories and housing - Will Reduce Firms Costs and encouraging investment
What is meant by Red Tape?
- Excessive regulation that hinders an action
Free market Supply-Side Policies - Flexible Labour Markets
- Reduce power of trade unions, minimum wages and regulations. - Enable zero hour contracts - Cheaper for firms to hire and fire workers, and encourages firms to take on workers in the first place
Free market Supply-Side Policies - Free-Trade Agreements
- Reduce tariffs and other barriers to trade - Will Increase Trade and provide Firms with an incentive to export
Free market Supply-Side Policies - Reduce Welfare Payments
- Increase incentive to get a job and to work longer hours
Examples of Interventionist Supply-Side Policies.
- Public Sector Investment - Education - Vocational Training - Housing Supply - Health Spending
Interventionist Supply-Side Policies - Public Sector Investment
- Invest in infrastructure, improve transport and reduce cost of transport for firms - With transport there is often a market failure (congestion and pollution) Government Spending on improving transport overcomes this market failure
Interventionist Supply-Side Policies - Education
- Increase funding to schools and universities. - Improve Labour Productivity and Increase AS - Often there is under provision of labour in the free market, leading to market failure. Therefore the government may need to subsidise education and training schemes
Diagram showing the effect of an increase in Aggregate Supply.
Diagram of the Phillips Curve.
