Supply-Side

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  • SUPPLY-SIDE
    • Study of how changes in LRAS will affect variables such as GDP.
    • Policies aimed to improve micro economic performance, individual markets, improve macro performance.
    • Market based & interventionist approach
      • Market based policies designed to remove barriers to the effeicent working of markets;barriers may limit output.
      • Interventionist:correct market failure
    • Increasing incentives
      • Taxes on income
        • High tax=discourage individuals from working.
          • Free market economists=high marginal tax rate have a strong discentive effect on work.
          • Laffer Curve: As tax rates increase, economic activity is discourage;hence rate of growth of tax revenue falls.
            • Above OA, increase in tax rates;discourages economic activityBelow OA, get less revenue;doing yourself (government) dissentive;could extract more
    • Welfare Benefits
      • Incentive to work will be low if WB are high.
        • One solution: Cut state unemployment benefits.
      • UC way of combining all benefits
    • Poverty & Unemployment traps
      • Occurs when low income working individuals or househods earn more,e.g gaining promotion,but net gain is little or negative.
        • E.G: Individual earms an extra £1, loses 50p in benefits; pays income tax at 30%; net gain earning extra £1 is 20p.
      • Unemployment occurs as employed person is better off staying unemployed
    • Subsidising workers
      • Incentive for workers to take on work; more work.
      • In UK, low-paid workers; claim income tax credit;desgined to reduce the marginal tax rates; occur when have to pay tax & lose benefits
    • Taxes on profit
      • High rates of taxation; firms distrubute to shareholders as future profits after tax would be low & so rate of return on investment made now will be lower than if taxes were lower
    • Research and Development
      • Market based approach: cut taxes on company profits.Interventionist approach: government undertake R&D itself.
    • Promoting Competetion
      • Privitisation
        • Sell of governement organistations or assets to private sector.
          • Allows assets to be used more efficently
        • Free market economists argue: government run organisations; little incentive to reduce costs & innovate.
      • Deregulation
        • Process of removing governemt controls form markets; e.g local council;remove restrictions for amount of taxis for hire in area.
          • Aim; Encourage more firms to provide goods and services; increase ouput, lower price
        • Problem: firms only provide services in most profitable area
      • Competiton policy
        • Designed to increase comp. in markets; reduce monopoly power; cartels illegal.
          • Reducing price & increasing output, this policy; raise output in economy; increase AS.
      • Industrial policy
        • Gov. policy to promote & support individual firms that are considered important for growth in economy.
      • Reforming the labour market
        • Level of LRAS is determined in part by quantity of labour supplied to market & productivity of that labour
        • Improving labour market flexibility
          • Degree to which demand & supply in a labour market respond to external changes & returns to a new market equillibrium
          • More flexible labour markets, e.g UK, associated with lower unemployment rate; higher participation rate;larger proportion of population working.
            • However also associated with lower average wages
          • External numerical flexibility
            • Ability of firms to adjust their workforce according to their needs.
          • Internal numerical flexibility
            • Ability of firms to adjust the working hours of staff to suit their needs; Effectively they become perfectly flexibile
          • Functional flexibility
            • Occurs when a firm can redeploy a worker from one job to another; requires multi functional workers
          • Wage flexibility
            • Occurs when firms are able to adjust wages up & down according to the forces of demand & supply in labour market
            • Weak trade unions; more likely firm can impose pay cuts.
        • Trade Unions
          • Purpose is to organise workers into one bargaining unit; becomes a monopolist, sole seller of labour, prevents workers from competeting with each other.
            • Economic theory predicts: if TU raise wage rates for members; employment & output will be lower in competetive markets. Free market economists argue government should intervene to lower power of TU.
        • Migration
          • UK: Increase in migration of working age people=> wages should be lower due to increase supply.
          • UK coukd benefit from immigrants; this type of policy would mean those with more desirble skills, fill in skill gap; would be granted visa
        • Minimum wages
          • Free market economists argue that minimum wage; should be abolished; higher wage rate, less demand from employers to workers
    • improving the skills and quality of the labour force
      • Education
        • Interventionist approach: Government set a curriculum, presribe teaching methods, set targets.
        • Free market approach: Allow schools to compete for students, set own curriculum/teaching methods.
      • Training
        • Give rise to market failure; firms are responsible for training; may provide little due to costs.
          • Market based approach: government gives subsides. Interventionist approach: Government provide training itself
      • Immigration
        • Encourage immigration of individuals with above average skills as explained above.
    • Improving infrastructure
      • Poor roads; longer journey; higher cots for firms
      • Two issues; amount spend on infrastructure % of GDP; lower than EU countries. Other is geographical allocation
    • Encourageing the growth of small & medium size businesses
      • Provide new jobs; become big business to,morrow
      • Encouraged via training; benefits. Red tape is often less for largel firms

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