Supply- Side Policy Flashcards
What is supply side policies?
deliberate actions taken by the government designed to increase the LRAS of the economy
What will successful supply side policies lead to?
- shifts LRAS outwards (to the right)
- increase amount that an economy can produce without inflationary pressures emerging
What are supply side improvements?
arise out of general increases in the production capacity resulting from businesses acting out of their own interest in improving efficiency and the quantity of their output
Differance between supply side policies and improvements?
policies are actions taken by the gov to improve productive capacity, improvements are firms increasing output
What can direct taxes on incomes be seen as?
disincentives to work, higher the income, the less attractive work becomes
What are two supply side policies for taxation ?
- reducing income tax (more incentive to work, more workers, higher ouput)
- reducing coorporate tax (encourages investment and attracts foreign firms)
What is a flexible labour market?
where there are few barriers to firms hiring and firing workers as required
What is the purpose of labour market supply side policies?
- create a more flexible labour market by reducing the barriers to entry into differant markets
What are further labour market supply side policies?
- reductions in welfare benefits
- trade union reform
- changes in legislation
Hwo are reductions in welfare policies a supply side policy?
- making work more financially attractive encourages people into job vacancies
- making being unemployed less attractive, making it harder to recieve welfare benefits and also reducing the value
How is the trade union reform a supply side policy?
- taking away legal power from trade unions to make it harder for them to push up wages
- also makes it easier for firms to determine terms and conditions that are more favourable to the business, encouraging firms to hire workers
How are changes to legislation a supply side policy?
- employment contracts give workers favourable terms which make it harder for firms to get rid of them, increasing cost to firms
- making it easier to hire and fire workers by reducing rights means more firms will employ and increaes labour market flexibility
Explain industrial supply side policies ?
- making markets more competitive
making industries more responsive to market forces should increase output and employment within that industry
What are the two types of industrial supply side policies?
- deregulation
- privatisation
What is deregulation?
the removal of regulations, usually to allow more competition in a market
why is deregualtion a supplyside policy?
- removal of regulations opens up market to allow multiple firms to operate
- removal of barriers of entry should lead to increases in output, less complacency by firms, low prices and higher quality of output
What is privatisation?
the sale of a public sector organisation to the private sector - designed to improve the effeciency and profitability of the business
Why are private sector organisations run?
benefit of the owners
Explain how privatisation is a supply side policy?
- the profit motive ecourages firm to boost profit so owner will recieve higher reward, the profit motive forces form to take action in improving effeciency, cut costs and increase production
What are the four other supply side policies?
- training
- education
- infrastructure
- entrepreneurship
How is training a supply side policy?
- encouraging firms to spend on training should increase capacity due to increased productivity and reduced immobility of workers
How is education a supply side policy?
- gov providing education schemes (apprenticeships) so supply of labour meets demad
How is infrastructure a supply side policy?
- infrastructure is physical capital that facilitates business activity (railways, roads, communication systems)
- govs investing infrastructure will improve geographical immobility and attract new businesses
How is entrepreneurship a supply side policy?
- gov making it easier for new businesses to set up by offering assitance and reducing legal and administrative burdens on new businesses
What is the efefct of supply side policies on GDP?
- increasing capacity in economy should increase GDP
- supply side policies need to be used in conjunction with policies to manage AD
Effect of supply side policies o unemployment?
- lower income taxes will enourage more work
- reduced welfare benefits will encourage work
- dregulation should increase competition and firms will need more workers
- improvements in education and training should decrease occupational and geographical immobility
Effect of supply side policies on inflation?
- higher capacity means AD can increase, leading to lower inflation
- trade union reform should ease cost push pressure as less upward pressure on wages
- more competition in markets will mean it is harder for firms to increaase prices due to declining monopolistic power
Effect of supply side policies on balance of payments?
- downward pressure on prices should make UK exports more competitive, imrpoving current account balance
- more productive workfore should lead to lower prices UK output, improving balance
- quality of output should improve, higher demand for UK exports, improving balance
What are some limitations of supply side policies?
- tax cuts often favour those with higher incomes
- cutting benefits is more likely to increase poverty
- reducing the rights of workers may prove unpopular with workers
- policies may take many years to take effect
