Chapter 10 Flashcards
Supply side policies
are government policies that are aimed at increasing the productive capacity
of an economy. This means that the economy can supply more goods and services in the long run.
Supple side policies can achieve what three things
improves the efficiency of the economy, ie fewer resources are needed to produce the same output
improves the competitiveness of the economy, creating a demand for our exports
increases the productivity of the economy, allowing more output at the same cost
What was an advantage of reducing union power to producers
Therefore, the government wanted to weaken Trade Union power and create a more ‘flexible labour
market’, meaning that union members could effectively be by-passed, and new employees could be taken
on to do their job. This meant that businesses could increase production, lower their costs and increase
suppl
Reducing income tax boosts the economy how
governments believed that reducing income tax would lead to a surge of
competition in the labour market. If a worker keeps more of their disposable income, then they are
incentivised to work more, and this leads to more production, increased productivity (due to the increased
competitiveness of the labour market) and lower average costs for firms. It also encourages the wealthiest
(the ‘wealth creators’), who gained most from the tax cuts to use their increased incomes to invest in more
entrepreneurial activities, such as setting up new businesses, that creates competition, creates jobs and
boosts supply in the economy
Reducing Benefits
decreases unemployment how
to encourage even more competition in the labour market, governments started
to reduce benefits, especially for those that were unemployed. This created an incentive to become
employed rather than to stay at home or work less hours, in order to claim benefits.
Privatization why would it occur
The rationale is that a private firm would
be more efficient because in order to make more profit, they would have to lower costs and prices to
compete.
Regulation and deregulation purposes
At the beginning there was little competition and so the firms were
regulated (so they could not make excessive profit due to them being a private monopoly) but over time,
the markets were deregulated in order to introduce competition. This created an even bigger incentive
for firms to be efficient in order not to lose out to competitors. As more and more firms enter the market,
innovation is also likely to occur and overall, there should be a big increase in potential supply and this
should lead to falling prices for consumers in these markets. Many of these markets are now oligopolies
and are still regulated by government
Reducing corporation tax advantages
– to encourage more firms to set up, the government reduced the tax on
profits for companies. This meant that foreign firms would be attracted to the country to set up (inward
foreign direct investment), which creates competition within the domestic market and that drives efficiency
gains. Corporation tax was often reduced for small firms as well in order to encourage entrepreneurialism.
Once again, this leads to more competition. It also means that firms were also likely to have higher profits
that can be invested into research and development. This normally leads to increased productivity and
therefore increases potential supply even further
Education and training increases competitiveness how
in order for businesses to be productive, a good quality labour force is needed
and therefore education and training is crucial in order to increase supply. It also leads to a more
productive labour market that can drive down wages which can also help businesses produce more,
resulting in increased competitiveness.
Investment in infrastructure why would you
improving or building more roads, railways and airports, is an example
of the government trying to boost the infrastructure in a country in order to make it easier for businesses
to operate.
Healthcare advantages
his is seen as a supply-side policy because if you have a healthier workforce, then they
should be more productive and have fewer absences from work.
How do supply-side policies impact Ensuring price stability
he process of improving economic efficiency should ensure that costs of production decrease or rise at a
sustainable level.
How do supply-side policies impact Achieving economic growth
An improvement in efficiency should lead to an increase in output, generating improved profits, higher wages
and economic growth.
How do supply-side policies impact Maintaining full employment
Supply-side policies aimed at improving skills should ensure that individuals become more employable.
Increased efficiencies and profits for businesses should encourage greater employment.
How do supply-side policies impact having a balanced current account on the balance of payments
If the UK’s economic efficiency improves then UK products and services should become more price
competitive, generating an increased demand for UK exports.
Achieving greater equality
Improved economic efficiency and economic growth can allow the government to ensure policies aimed
at improving equality (such as an improved educational provision) are implemented. An improvement in
employment opportunities should also lead to greater equality.
Disadvantages of supply side policies in terms of time
Supply-side policies can take a long time to have any impact. Some policies could take 10-15 years, but others
could have an impact in a few months, therefore it is important to view time lags in the context of the policy that
is being looked at.
how is it possible that the increase of production could occur from supply side policies
Some supply-side polices can be very costly and this is important in the context of a budget deficit. Governments
may not wish to introduce big infrastructure projects because of the cost and the impact it will have on government
borrowing. There might also be a problem that in the short run, any spending on a supply-side policy, would be
a fiscal, demand-side policy and if there is not spare capacity in the economy, then inflation could occur, and
this could lead to wage demands that increase the costs of production.
Policies that incentivise both the rich and the poor are disadvantages because they often lead to
distribution of income concerns. If personal
allowances are being raised to encourage people into the labour force, however social security benefits are
being reduced, then the likelihood is that the gap between the workers and the non-workers will increase.
What must we consider when speculating about investing in infrastructure
the environment impact that follows
Golden scenario
of low inflation, high economic growth, low unemployment and a a
balanced current account on the Balance of Payments. As supply increases, it opens up the economy for
growth without any demand pull pressure being put on prices. It also helps firms to be more efficient and
productive, which then makes them more internationally competitive, thus creating even more jobs and growth
how is the golden scenario achieved
if supply side policies work
