Chap 28 Flashcards
Define Supply-side policy
measures designed to increase aggregate supply
Aims of supply-side policies
- Increase productive potential
- Increase the quantity and quality of resources
- Raise the efficiency of product and factor markets
Supply-side policy examples
- Improving education and training
- Cutting direct taxes and benefits
- Reforming trade unions
- Privatisation.
How will improving education and training increase aggregate supply?
Increases the skills of workers making them more productive which reduces costs of production and raises the quality of the products, helping them sell more
More skilful workers are also likely to be more occupationally mobile so supply would adjust more quickly to changes in demand.
How will lowering direct taxes and increasing incentives increase aggregate supply?
Reducing income tax rates /cut in unemployment benefits will encourage the unemployed to search for work more actively and may increase the labour force
Cutting corporation tax may increase the incentive to invest. This is because it is likely to make firms more willing and able to invest.
How will lowering direct taxes and increasing incentives not help in increasing aggregate supply?
Some workers may respond to lower income tax by working fewer hours
Will not be effective if there are not jobs available for the unemployed and those currently inactive to do.
The unemployed & the disabled will have less income to spend. This may result in a fall in aggregate demand and so output and employment.
f firms do not think they will be able to sell more goods and services in
the future, they will not want to expand.
Define Deregulation
the removal of rules and regulations
How will deregulation increase aggregate supply?
If deregulation does increase competition, it may increase efficiency and so lower costs of production and prices.
Aims of deregulation
Removes barriers to entry to markets
Reduces the costs of complying with the rules and regulations
Reduces the cost to the government of regulating the industries and occupations affected
How will deregulation decrease aggregate supply?
Monopoly will develop
Imposing restrictions on who can undertake particular occupations may also protect consumers
How will privatisation increase aggregate supply?
Moving industries into the private sector may put more pressure
on them and provide them with a greater incentive to respond to changes in consumer demand, and to provide them with high quality products at low prices.
Privatisation will increase productive capacity, if private sector firms invest more and work more efficiently than state- owned enterprises.
How will privatisation decrease aggregate supply?
A monopoly may develop
A private sector firm may be less inclined to take into account social costs and social benefits than a state-owned enterprise and may be more willing to make workers redundant.
How will Labour market reforms increase aggregate supply?
Removing long contracts-
Increases the efficiency of labour markets (easier for firms to adjust their supply to changing market conditions)
It may also encourage firms to employ more workers as they will know that they will not have to continue to pay them, should demand for their products fall.
Reform of trade unions-
If the power of trade unions is reduced, they may be less inclined to engage in industrial action.
There may be less disruption to production and trade union members may be more willing to be flexible in what tasks they do and the hours they work.
Define Labour market reforms
Designed to make labour markets work more efficiently. The intention is to increase the quality, quantity and flexibility of labour.
How will Labour market reforms decrease aggregate supply?
Firms may not spend as much on training their workers if they think the workers may not be with them for very long.
How will Subsidies increase aggregate supply?
New small firms might be subsidised in order to increase competition in markets.
Firms may also be subsidised to encourage them to buy new capital equipment.
(Risk that the firms may become dependent on the subsidies)
Govts macroeconomic aims
- Economic Growth
- Price Stability
- Full Employment
- Balance of Payments Stability
- Income Redistribution
How does supply side policies help to achieve aims?
- Increasing aggregate supply enables an economy to continue to grow in a non-inflationary way
- Increasing productive potential and efficiency can improve an economy’s balance of payments position.
- Producing better quality, and cheaper, products can increase exports and reduce imports.
What can a government do to try to ensure that it achieves all its macroeconomic aims?
- By using a number of policies (provide investment grants to firms and place a tax on imports)
- Have as much accurate information as possible. (Size of the multiplier effect of any increase in aggregate demand- may push up the price level)
- Implement their policies relatively quickly (danger that economic activity undergoes a change and the policy measures may actually harm the economy)
