Supply- side policies


The meaning of supply-side policies

  • A response to increasingly fierce international competition and they aim to change the underlying structure in the economy.
  • Supply-side policies such as tax changes designed to change personal incentives, may increase potential output and improve the underlying trand rate of growth

They also affect:

  • The level of unemployment
  • The rate of change of prices
  • UK external performance as reflected in the balance of payments

Act on the motivation and efficiency of individual economic agents to improve economic performance

If successful, such policies also have a macroeconomic effect by shifting the economy's long-run AS curve to the right

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Main features of UK supply-side policy

Industrial policy meaures

  • Privatisation - the sale or transfer of assests such as nationalised industries from the public sector to the private sector
  • Marketisation - the shifting of economic activity from non-market provision financed by taxation to market provision
  • Deregulation - the removal of previously imposed regulations in order to promote competition by removing barriers to entry and to get rid of uneccessary red tape and bureaucracy, which raises firms' costs
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Main features of UK supply-side policy ...

Labour Market meaures

  • Cutting income taxes to create labour market incentives
  • Reducing state welfare benefits to create an incentive to choose low-paid employment rather than unemployment
  • Increasing labour market flexability by reducing the powers of trade unions and replacing jobs for life with short-term labour contracts
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Main features of UK supply-side policy ...

Finacial and Capital market measures

  • Deregulating finacial markets to create greater competition and lower borrowing costs
  • Encouraging saving by granting special tax privileges for saving and selling shares in privatised industries to encourage wider share ownership
  • Promoting entrepreneurship via tax cuts

  • Reducing public spending, budget deficit and government borrowing to free resources for private sector use
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Using AD/ AS diagrams to analyse supply-side poli

  • Aim to shift the economy's long-run AS curve to the right - increasing the economy's potential level of output


Supply-side policies can lead to an outcome in which invention and innovation reduces business costs - and price level - at the same time as promoting economic growth and higher levels of output and employment

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Impact on the national economy

  • By making markets more efficient and competitive, supply-side policies were vital in promoting and elongating the boom years
  • The bad side - high unemployment and widening income inequalitities
  • The good side - continuous economic growth that kicked in when the appropraite policies were in place

The private sector's role in improving the supply-side of the economy

  • supply side policies promote entrepreneurship and popular capitalism
  • It cannot deliver unless the private sector does its job in improving labour productivity, innovation and investment
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