Supply Side policies Flashcards
What is a supply side policy?
Supply side policies are government policy tools used to increase aggregate supply within the economy.
What are the different supply side tools?
Increased spending on Education and Training
Promoting infrastructure and development
Support for technological improvement
Privatization and Deregulation
Trade union reforms
Encouragement of immigration
Increased spending on education and training
By spending, they can improve the skills and quality of the workers. This can allow them to gain more skilled jobs that pay more. It also increases their flexibility and mobility.
Over time, you are increasing the number of workers available for skilled jobs, increasing productivity capacity.
A better-educated population is more likely to increase the quality of entrepreneurship as well, which can increase innovation.
Infrastructure and Development
Good infrastructure allows the firm to keep costs low, allowing them to focus on building high quality products at a greater quantity. For example, less power outages means the production process runs smoother. Better rail tracks mean fewer costs of traveling and faster travel times. These all help increase the ability for production to be more efficient allowing for an increase in AS.
The government could pay for this or get private companies to pay for it while providing incentives such as getting the revenue from people using the service.
Improved technology
It improves the efficiency of the production process. For example, faster generators producing more electricity per second. As capital equipment gets more efficient, the potential for output to increase rises even more.
Trade Union reforms
Trade union reforms may cut down on the amount of leave taken by workers, improving productivity. It also makes MNCs more willing to invest in the country. It is possible it may increase both productivity and production
Privatization and Deregulation
Some governments believe that its better for private entities to take care of production for certain goods and services. To ensure this happens smoothly, they will reduce barriers to entry and laws and regulations that increase a firm’s cost of production.
Encouragement of immigration
By increasing immigration, they attract more skilled workers, allowing for greater quality and quantity of labor in the country.
The impact of supply side policies on national income and real output
By increasing the productivity of labor and capital resources, supply-side policy tools can improve the efficiency and productive capacity within the economy.
By improving technology, they raise the quality and productivity of capital goods.
By improving the quality of workers, they improve the standard of skilled workers in the country, allowing for more production of goods and services.
By improving infrastructure, it increases the quantity of resources that can be used in the production and transport of products.
The impact on the price level
Over time, AD tends to increase; if increases in AS keep up with higher AD, then there will be minimal demand-pull inflation.
The effectiveness of supply side policies
Spending on education and training has the potential to be very beneficial in the long run. However, in the short run, it could lead to the opposite, which is inflationary pressure. This is because increased spending on education and technology can increase AD before increasing AS.
Additionally, if their education is not up to standard or teaches them skills that aren’t in demand. It could be a loss for the government rather than a gain. Their skills might increase, but if their pay rises more than their productivity, costs of production rises
Spending on infrastructure is expensive and can lead to harmful effects on the environment. However, it could also provide the positive effect of being a space where people can be as productive as possible and work together to improve the quality of products. For example, Silicon Valley.
Any supply-side policy that increases AS will not raise output if there is spare capacity within the economy. Even though productive potential has been increased, there might not be demand to use it. Firms may be capable of producing more but they will not if there is no demand to produce it for.
