An Introduction to Supply-side Policies (AQA A Level Economics)

Government policies aimed at increasing the production capacity of the economy

Achieved by by focusing on factors that affect the supply side, such as labor, capital, technology, and entrepreneurship

Specific actions made by firms within the supply side of the economy to enhance its performance and efficiency

Influence the macroeconomic environment and structural conditions of the economy to promote long-term growth and competitiveness

Enhance efficiency, quality, and competitiveness within individual firms or sectors

Tax cuts, deregulation, investment in education and training, subsidies for research and development, and infrastructure development

Firms adopt new production techniques, invest in advanced machinery, implement quality control measures, streamline supply chains, enhance worker skills through training programs etc.

Broad range of government interventions aimed at shaping the overall economic environment

Actions taken by firms, industries, or markets to boost efficiency and productivity

Typically involves government intervention and policymaking.

Can be driven by various agents, including businesses, workers, consumers, and technological advancements

The potential national output increases, leading to higher real gross domestic product (rGDP)

Supply-side policies reduce labour costs and create labour market flexibility through:

• Decreasing trade union power so wages can be decreased

• Decreasing or abolishing minimum wages to lower costs of production

• Restructuring the unemployment benefits system to incentivise the unemployed to seek work

Supply-side policies reduce average price levels

• By deregulating the market and reducing taxes, it reduces businesses’ costs of production there will be less cost-push inflation 

• Demand-pull inflation could also be reduced as potential capacity of economy increases (PPC curve shifts outwards)

Supply side policies such as Increased spending on innovation and direct support to firms (subsidies) promotes international competitiveness

• This can increase the value of net exports

• An increase in export demand from abroad causes the balance of payments on the current account to improve 

Labour market deregulation, flexible work arrangements, and reducing barriers to entry into professions increase the flexibility of the labour market

• This flexibility allows workers to more easily transition between jobs, and reduces frictional unemployment

Education and training systems enhance the skills of the workforce

A more skilled workforce is better equipped to meet the demands of a changing economy, which reduces structural unemployment

Policies such as tax incentives for research and development (R&D), subsidies for small business create new job opportunities, thereby reducing unemployment.

Cutting red tape for businesses, lowering taxes on labour, and implementing targeted employment subsidies, encourage hiring and labour force participation

More people enter the labour market, reducing the natural rate of unemployment.

Tax cuts for businesses, deregulation, infrastructure investment, and trade liberalisation, stimulate investment and economic growth

A growing economy generates more job opportunities and reduces unemployment over the long term