Supply-Side Policies (Edexcel A Level Economics A)
Revision Note
Supply-side Policies
Supply-side policies aim to shift the long-run aggregate supply (LRAS)
There are two categories of supply-side policies
Interventionist and market-based
Interventionist supply-side policies require government intervention in order to increase the full employment level of output
These are mainly used to correct market failure
Market-based supply-side policies aim to remove obstructions in the free market that are holding back improvements to the long-run potential
E.g. Setting up a regulator to prevent monopolies forming
Aims of Supply-side Policies
Broadly speaking, there are five aims of supply-side policies
The overall aim is to increase the quantity/quality of the factors of production
Market Based and Interventionist Strategies to Meet the Aims of Supply-side Policies
Aim of Supply-side Policy | Market Based Approach | Interventionist Approach |
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To increase incentives |
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To promote competition |
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To reform the labour market |
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To improve the skills and quality of the labour force |
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To improve infrastructure |
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Examiner Tip
MCQ will test your ability to differentiate between market-based and interventionist supply-side policies.
When evaluating supply-side polices in essay responses, demonstrate critical thinking by acknowledging that privatisation has been used for so long that there is little left to privatise and perhaps a better way forward is to improve competition policy and regulation.
Remember, the private sector will also be increasing supply in an economy (it is not only up to the government) as they are incentivised to increase their profits.
Diagrams to Illustrate Supply-side Policies
Successful supply-side policies will increase the long-run aggregate supply (LRAS)
This equates to an increase in the production possibilities of an economy
The successful implementation can be illustrated on either a Classical or Keynesian diagram
Diagram analysis
E.g. Efforts to reduce trade union power have been successful
There is now less protection on wage levels
Wage levels fall
Firms will now hire more workers and the quantity of productive labour in the economy has increased
This causes LRAS1 to increase to LRAS2
Output increases from YFE to YFE1
Average price levels fall from AP1→AP2
Strengths & Weaknesses of Supply-side Policies
Strengths of supply-side policies
They increase the rate of growth of an economy
They reduce average price levels
They reduce unemployment
They often increase the value of net exports
Improvements in Infrastructure can raise the quality of life for all citizens
Weaknesses of supply-side policy
The distribution of income worsens as labour market reforms and wage policies lower worker's wages
They are expensive to implement
There are significant time lags between expenditure and seeing the benefits
Due to the long-term nature, changes in government often result in changes to budgets and scope of projects
The end result may be less effective than it could have been
Vested interests can result in less effective outcomes e.g. There are many examples of privatisation occurring in such a way that the government's preferred bidders obtained an asset at a knock down price
Often the preferred bidders were not necessarily the most efficient firms
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