Supply side policies

Question 1

What are supply side policies?

Answer 1

Supply side policies- action by government intended to ⬆️ amount firms willing to supply at given price level-> ➡️ward AS shift

Question 2

What are the types of supply side policies?

Answer 2

1) Increasing ⬆️ effectiveness of markets methods

2) Interventionist approach methods

Question 3

How can the effectiveness of markets be increased?

Answer 3

1) ⬆️ price flexibility & signalling- price allocation may-> surpluses/shortages if ✖️ allocated effectively- EXAMPLE- if government ✖️ ⬆️ real minimum wage-> real wages ⬇️-> ⬇️ unemployment (firms can employ ⬆️ workers with ⬇️ wages)-> ⬇️ firm production costs-> AS ➡️ward shift-> surplus
… price mechanism needed to resolve any surpluses or shortages

2) ⬆️ competition- competitive firms ⬇️ costs or ⬆️ innovation to survive-> ➡️ward AS shift due to ⬇️ costs- done by ⬇️ artificial constraints e.g. legal monopoly rights, privatise firms & deregulation (⬇️ government rules/restrictions on businesses)-> ➡️ward AS shift
3) ⬆️/improving incentives- ⬆️ rewards for ppl-> motivates hard work e.g. ⬇️ income/corporation tax-> ➡️ward AS shift

Question 4

What are the interventionist approach methods?

Answer 4

1) ⬆️/improving education 📚 and training- ⬆️ occupational mobility of workers (transferable skills) and ALSO determines level of human capital (skills and knowledge of workforce)-> ⬆️ productive and efficient labour force ALSO ⬆️ employment better skilled- take up higher paying jobs-> ➡️ward AS shift BUT expensive 💵 and large time ⏰ lag

2) Improving infrastructure- e.g. government spending on transport (road connections- motorways etc, train 🚆 travel, airports ✈️ etc)-> ⬇️ travel costs etc- EXAMPLE- HS2 ⬇️ 🚂 travel time ⏰ … ⬆️ efficiency
⬇️ costs and ⬆️ efficiency-> ➡️ward AS shift

3) Performance related pay 💵- encourages employees to work harder-> ⬆️ firm production-> ➡️ward AS shift
4) Incentives for investment- e.g. tax breaks-> ⬆️ investment into R and D and capital equipment etc-> ⬆️ efficient and productive production-> ➡️ward AS shift

Question 5

What are the evaluation points of supply side policies?

Answer 5

👍- effective in some industries e.g. 📞 industry-> better price & after care services
👎- demand deficient employment-> ✖️ effect of supply side policies e.g. 🇯🇵- ✖️ change in equilibrium despite ⬆️ in productive capacity (LRAS) as ✖️ change in AD (AD crosses horizontal part of Keynesian LRAS curve- SEE ➡️)
👎- creates poverty & inequality e.g. ⬇️ in Jobseeker allowance benefits (encourage some to work BUT dependent on availability of jobs), ⬇️ minimum wage (encourage firms to employ but limited employed), ⬇️ trade union power
👎- time ⏰ lag- some policies e.g. education 📚 take many years to have effect on production costs & ⬆️ costs in short-run because ⬇️ ppl in labour market & ⬆️ in 📚