4.5 Supply-side Policy (Cambridge (CIE) IGCSE Economics)

Supply-side policy aims to increase the total supply (productive potential) of the economy by increasing the quality or quantity of the factors of production.

A production possibility curve shows the maximum possible output combinations of goods and services an economy can produce using all of its available resources and technology.

An outward shift of the production possibility curve represents an increase in the total supply of an economy.

The purpose of labour market reforms is to:

• Decrease trade union power

• Reduce minimum wages

• Improve occupational mobility to encourage firms to hire more workers

Lower direct taxes, such as reducing income or corporation tax rates, incentivise workers to work harder and provide firms with extra funds for investment in new machinery and technology. Both of these increase total supply in an economy.

Deregulation is the process of removing government controls and laws from markets to increase competition and decrease costs for firms, potentially leading to greater supply.

True.

Improving incentives to work can include restructuring unemployment benefits.

True.

Privatisation encourages new firms to enter the market and compete, thus increasing the total supply in the economy.

The strengths of supply-side policies include:

• Increasing economic growth

• Reducing inflation and unemployment

• Increasing the value of net exports due to lower prices and greater exports

A weakness of supply-side policies is that they are expensive to implement and often have significant time lags before the benefits are seen, such as in education and training.