Supply-Side
- Created by: HilalKhan99
- Created on: 02-01-19 15:19
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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
- High tax=discourage individuals from working.
- Taxes on income
- Welfare Benefits
- Incentive to work will be low if WB are high.
- One solution: Cut state unemployment benefits.
- UC way of combining all benefits
- Incentive to work will be low if WB are high.
- 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
- Occurs when low income working individuals or househods earn more,e.g gaining promotion,but net gain is little or negative.
- 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.
- Sell of governement organistations or assets to private sector.
- 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
- Process of removing governemt controls form markets; e.g local council;remove restrictions for amount of taxis for hire in 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.
- Designed to increase comp. in markets; reduce monopoly power; cartels illegal.
- 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.
- Purpose is to organise workers into one bargaining unit; becomes a monopolist, sole seller of labour, prevents workers from competeting with each other.
- 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
- Privitisation
- 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
- Give rise to market failure; firms are responsible for training; may provide little due to costs.
- Immigration
- Encourage immigration of individuals with above average skills as explained above.
- Education
- 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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