Supply-Side Policy

Question 1

Supply side policies

Answer 1

Government policies to increase the productivity and efficiency in an economy leading to an increase in the quality and quantity of factors of production
- therefore increasing the productive capacity of the economy

Question 2

What impact does SSP have on macroeconomic policy objectives?

Answer 2

• shifts the LRAS curve to the right which increases output from Y1 to Y2 and price decreases from P1 to P2
• lowers inflation and increases economic growth

Question 3

Improving Infrastructure and transport

Answer 3

• improved geographical mobility of individuals and so can get to work faster and easier
• become more productive and incentivize people who are more skilled to travel further as it is easier
• incentivizes FDI to invest into the country
• improves productive capacity as can now hire more efficient workers
• can incentivize other firms from different countries to move to the UK

Question 4

Competition policy

Answer 4

• decrease in tariffs will make it cheaper for firms to import raw materials, decreasing their cost of production and so can produce more
• if other countries also decrease their tariffs you can take part in free trade
• increase exports so more profit

Question 5

Improvements in education

Answer 5

If higher skilled and more trained workers they can provide higher quality factors of production which increases productive capacity
- higher quality goods and less likely to make mistakes

Question 6

Improvements in Healthcare

Answer 6

• individuals are able to get well quicker and return back to the workforce
• decreases time off work and increases productive capacity

Question 7

Reformation of the tax and benefits system

Answer 7

Decreasing taxes and benefits what incentivize people to enter the workforce because the wage replacement ratio will decrease
- will get more money at work than benefits so more incentivized to work so productive capacity increase

Question 8

Subsidies

Answer 8

A grant given by the government to firms to lower cost of production and more incentivized to invest in capital
- increases the quality and quantity of factors of production and therefore productive capacity increases

Question 9

Increase in labour market flexibility

Answer 9

• zero hour contracts allow labour markets to be extremely flexible as firms can just hire people when needed
• decreases firms costs of production
• due to a reduction in trade union power workers won’t go and strikes or demand higher wages which increased productive capacity

Question 10

Advantages of supply side policies

Answer 10

1. Reduction in inflationary pressure
- increases productive capacity, so LRAS shifts to the right, so prices decrease

2. Decreases unemployment
- decreasing benefits incentivizes people to go and look for work
- improving infrastructure increases geographical mobility
- subsidies given to firms lowers their costs of production and so can hire more workers
- investing in education and training means people now have more transferable skills and occupational mobility

3. International competitiveness
- if an increase in subsidies, firms can invest in research and development which leads to higher quality good which increases demand and so are more competitive
- cost of production decreases so prices lower which makes them more price competitive
- if invest into training, firms will have access to higher skilled workers so can produce higher quality goods

4. Limits conflicts of macroeconomic objectives
- increases economic growth and decreases inflationary pressure
- unlike demand side policies which increases economic growth but also increases inflationary pressure

5. Increases FDI
- high levels of education, infrastructure and healthcare may incentivize MNC’s companies or FDI to invest into the economy

Question 11

Disadvantages of supply side policies

Answer 11

1. Time lag
- the effect of supply side policies takes a long time to have an impact

2. Increase unemployment
- immigrants are often prepared to work at lower wages and more hours and therefore likely to get jobs more than domestic workers
- immigrants sent out remittances which are leakages out of the circular flow of income
an increase in subsidies may lead to ferbs by more capital which increases capital labour substitution

3. Expensive
- provision in education, infrastructure, subsidies is very expensive to invest into
- increases government costs which increases their national debt
- worsens the economy’s fiscal policy position as leads to an opportunity cost
- firms may not use their subsidies but retain it as profit

4. External costs
- decreasing trade union power may lead to the exploitation of workers and increase income inequality
- can increase negative externalities of production such as high levels of pollution

5. Deregulation
- deregulation may lead to higher prices and poor quality goods and services
- consumer welfare decreases as people may not be able to afford the good anymore

6. MNC’s may be exploitative
- multinational companies may come into the country and take advantage of cheap labor
- may give very low wages or poor working conditions
- depleting natural resources at a quicker rate

Question 12

What does the effectiveness of supply side policies depend upon?

Answer 12

1. Impact on income inequality
- Investments in advanced technology, leads to high levels of unemployment as low-skilled workers replaced
- reform of the tax and benefit system depends upon if the individuals on benefit have the skills or quality to enter the workforce
- depends upon policy governments put in place to train workers and whether job vacancies are available
- owners make a lot of profits
- if taxes increase high income earners still able to afford goods and services
- if benefits decrease low income households can no longer afford goods and services

2. Supply side policies in other countries
- domestic supply-side policies need to be as advanced as other countries to stay competitive
- if not, FDI will go at invest in other countries

3. State of the economy
- if in a recession then increasing the productive capacity of the economy would not be a good thing as it mainly to deflation
- shifting LRAS during a recession wastes resources as they will already be spare capacity
- if confidence is low in a recession, a decrease in corporation tax or subsidies won’t be as effective as firms won’t invest

4. Using supply-side policies in isolation is ineffective
- supply policies must be combined with other policies to be effective otherwise it’s going to be a waste of resources
- demand side policies are needed at the same time as supply policies to ensure there is economic growth and stable price levels