Supply-Side Policy (Edexcel IGCSE Economics)

Revision Note

Author

Steve Vorster

Expertise

Economics & Business Subject Lead

What is Supply-Side Policy?

Supply-side policies aim to increase the total supply (productive potential) of the economy
- This is achieved by increasing the quality or quantity of the factors of production
The effect of supply-side policies can be represented through an outward shift of the productive possibility curve

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Outward shifts of a PPC show an increase in the total supply of an economy

The strategies used to increase total supply include education and training, labour market improvements, lower direct taxes, privatisation, deregulation, improving regional incentives to work and infrastructure spending
When any of these policies are instituted, the PPC shifts outward (Shift B) and more consumer goods and more capital goods can now be produced using all of the available resources

Specific Types of Supply-Side Policies

Supply-side policies can be extremely useful in generating long term growth, lowering average price levels and creating new jobs in an economy

Specific types of supply side policies

Supply-Side Policy	Explanation
Privatisation	The transfer of Government owned assets or firms into the private sector, usually by sale of company shares Privatisation encourages new firms to enter the market and compete, thus increasing the total supply and the efficiency in the economy
Deregulation	This is the process of removing government controls and laws from markets in order to increase competition and encourage new firms to enter the market Any regulation increases the cost of production for firms. Deregulation decreases costs, which may result in greater supply
Education and training	Increasing government spending on education and retraining raises the quality of the workforce Productivity increases also increase the supply of output
Regional policies	Encouraging firms to relocate to high unemployment areas Improving transport links to high unemployment regions Providing subsidies to firms to hire locally unemployed workers
Lower direct taxes	Reducing income tax rates incentivises workers to work harder (they keep more money for themselves) and encourages more workers to join the labour force Reducing corporation tax allows firms to keep more of their profits, which they can use to invest in new machinery and technology
Infrastructure spending	Spending on road and rail networks to improve transport links for goods and workers Improving broadband coverage to enable workers and firms to relocate to low-cost areas
Improving incentives to work and invest	Restructuring the unemployment benefits system to incentivise the unemployed to seek work Increased government spending on innovation increases the supply of potential jobs in the economy Direct support to firms (subsidies) increases output and promotes international competitiveness

Worked Example

Which one of the following is an example of a supply-side policy to increase output?

A. Increasing the school leaving age

B. Increasing unemployment benefits

C. Increasing interest rates

D. Increasing income tax

The Answer is A. Increasing the school leaving age

B is incorrect, as this will disincentivise unemployed workers from seeking a job

C is incorrect, as this is contractionary monetary policy

D is incorrect, as this is contractionary fiscal policy

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