Supply-side Policies | Notes

These revision notes cover everything you need to know about Supply-Side Policies for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

What are supply-side policies?

Supply-side policies are a range of policies that the government can use to increase the productive potential of the economy.

This causes a right shift in long-run aggregate supply.

The productive potential (LRAS) represents the output of the economy when all factors of production are fully employed.

What is the difference between interventionist and market-based supply-side policies?

Free market policies work by reducing government intervention and making markets more free, with the aim of improving productivity.

Interventionist policies work by increasing government intervention, with the aim of improving productivity.

What is the impact of supply-side policies on macroeconomics performance?

Supply side policies cause a right shift in long-run aggregate supply curve when they are complete.

This leads to an increase in economic growth and a decrease in the price level.

This type of economic growth is known as long-run economic growth or potential growth.

In the immediate future, supply-side policies can also affect aggregate demand due to changes in government spending or taxes.

Increasing spending on education and training

1. The government could increase spending on education and training.
2. For example, they could improve or offer new apprenticeships or training schemes.
3. This means that workers would develop more skills which means there is an improvement in human capital.
4. This would allow businesses to increase their productivity (output per worker per hour).
5. This means that businesses can produce more goods and services when all factors of production are fully employed.
6. This means there is an increase in productive potential.
7. This can be illustrated by a right shift in the long run aggregate supply curve.

Increasing spending on infrastructure

1. The government could increase spending on infrastructure.
2. For example, the government has spent £40 billion so far on HS2.
3. This aims to improve transport links around the UK.
4. This would allow businesses to increase their productivity (output per worker per hour).
5. For example, businesses and staff save time when travelling to client sites.
6. This means that businesses can produce more goods and services when all factors of production are fully employed.
7. This means there is an increase in productive potential.
8. This can be illustrated by a right shift in the long run aggregate supply curve.

Lower corporation taxes

1. The government could decide to reduce corporation taxes.
2. This means businesses pay less tax on their profits allowing them to retain more of their profit.
3. This allows them to increase investment into their capital and also the training of their workforce.
4. It also encourages more businesses to set-up in the UK.
5. Overall, businesses are able to produce more when all factors of production are fully employed.
6. This means there is an increase in productive potential.
7. This can be illustrated by a right shift in the long run aggregate supply curve.

Lower income taxes

1. The government could decide to reduce income taxes.
2. For example, currently in the UK, any income above £50,000 is taxed at 40%.
3. Lower income taxes incentivises people to re-enter the workforce.
4. For example, people may come out of retirement or migrate into the UK or work longer hours.
5. This may increase the number of skilled workers in the economy.
6. The average productivity of workers in the UK would increase.
7. Overall, businesses are able to produce more when all factors of production are fully employed.
8. This means there is an increase in productive potential.
9. This can be illustrated by a right shift in the long run aggregate supply curve.

Cut in welfare payments

1. The government could reduce welfare payments by reducing unemployment benefits or increasing the pension age.
2. This increases the incentive for more people to enter the workforce.
3. This means that there is an increase in the supply of labour.
4. This could lead to a fall in wages.
5. Overall, businesses are able to produce more when all factors of production are fully employed.
6. This means there is an increase in productive potential.
7. This can be illustrated by a right shift in the long run aggregate supply curve.

What are the downsides of most supply-side policies?

1. opportunity cost
2. time lag

For example, HS2 has already cost the UK government £40bn and it is yet to be completed.

Summary questions

1. what are supply-side policies?
2. what is the difference between interventionist and market-based supply-side policies?
3. what is the impact of supply-side policies on macroeconomics performance?
4. spending on education and training
5. spending on infrastructure
6. lower corporation taxes
7. lower income taxes
8. cut in welfare payments
9. what are the downsides of most supply-side policies?

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