supply side polices 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
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)
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
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
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 Interventionist Supply Side Policies?
Government intervention to overcome market failure
What is meant by the term Free-Market Supply Side Policies?
Policies to increase competitiveness and competition
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 and improves the 4 FOP
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
and cooperation tax
- 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
What is meant by expansionary fiscal policy?
– Cutting tax – raising government spending Or both
main objectives of supply side policy
Improve incen;ves to look for work and invest in people’s skills
2. Increase labour and capital produc;vity
3. Increase occupa;onal and geographical mobility of labour to help reduce the rate of unemployment
4. Increase investment and research and development spending
5. Promo;ng more compe;;on and s;mulate a faster pace of
inven;on and innova;on to improve compe;;veness
6. Provide a strong pla[orm for sustained non-infla;onary growth
7. Encourage the start-up and expansion of new businesses / enterprises especially those with export poten;al
8. Improve the trend rate of growth of real GDP
• Production
Value of output of goods and services e.g. measured by GDP or an index of produc;on in specific industry
• Produc:vity
- A measure of the efficiency of factors of produc;on • Measured by output per person employed
- Or output per person hour
does an increase in production mean an increase in productivity
An increase in produc;on DOES NOT automa;cally mean an increase in produc;vity - it depends on how many factors of produc;on have been u;lised to supply the extra output
