Supply-side Policy Measures (CIE IGCSE Economics)

• 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
  • It can be represented by an outward shift of the productive possibility curve
  • More consumer goods & more capital goods can now be produced using all of the available resources

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 reforms, lower direct taxes, deregulation, improving incentives to work & invest, and privatisation

• When successful, supply-side policies have the following effects on the government's macroeconomic objectives

1. Economic growth: potential national output increases leading to higher real gross domestic product (rGDP)
2. Inflation: a greater supply in the economy results in reductions in the prices of goods/services leading to disinflation
3. Unemployment: this should fall as more workers are required to produce the higher levels of output
4. Current Account Balance: due to the increased supply, the prices of goods/services often decrease which makes them relatively more attractive to foreigners - so exports increase & the current account balance improves
5. Redistribution of income: this often worsens with the use of supply-side policies as wages fall & government tax revenue has fallen too
    

Specific Types of Supply-side Policies

Supply-side Policy	Explanation
Education & training	Increasing government spending on education & retraining raises the quality of the workforce Increasing government spending on healthcare so that worker productivity improves
Labour market reforms	Decreasing trade union power so wages can be decreased encourages firms to hire more workers as they are cheaper Decreasing minimum wages to lower costs of production encourages firms to hire more workers as they are cheaper Increased government spending on improving occupational mobility
Lower direct taxes	Reducing income/corporation tax rates incentivises workers to work harder (they keep more money for themselves) & provides firms with extra funds which they can use to invest in new machinery/technology
Deregulation	This is the process of removing government controls/laws from markets in order to increase competition Any regulation increases costs of production for firms & deregulation decreases costs which may result in greater supply
Improving incentives to work & 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 & promotes international competitiveness
Privatisation	Government firms are usually so big that private enterprise refrains from trying to compete with them. Privatisation encourages new firms to enter the market & compete, thus increasing the total supply in the economy

 

Strengths of Supply-side Policies

• They increase the rate of growth of an economy
• They reduce inflation
• They often reduce unemployment 
• They often increase the value of net exports as an increase in total supply usually results in lower prices leading to greater exports
   

Weaknesses of Supply-side Policy

• The distribution of income worsens as labour market reforms & wage policies lower worker's wages
• They are expensive to implement
• There are significant time lags between government expenditure & seeing the benefits e.g. education & training often take a long time
• Due to the long-term nature, changes in government often result in changes to budgets & scope of projects
• 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