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.

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

Supply-side policies cause a right shift in the long-run aggregate supply curve.

This is due to an improvement in the quality or quantity of factors of production.

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 macroeconomic 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, for example through improved apprenticeships and training schemes.
2. This improves human capital since workers to develop more skills.
3. This increases labour productivity (output per worker per hour).
4. Businesses can therefore produce more goods and services when all factors of production are fully employed
5. This increases the productive potential of the economy, shown by a rightward shift in the LRAS curve.

Increasing spending on infrastructure

1. The government could increase spending on infrastructure. One example of this is the £40bn investment in HS2.
2. Better transport links reduce journey times, making it easier for workers and businesses to meet face to face.
3. In theory, this leads to work being completed per hour, therefore increasing productivity.
4. Businesses can therefore produce more output when all factors of production are fully employed.
5. This increases the productive potential of the economy, shown by a rightward shift in the LRAS curve.

Lower corporation taxes

1. The government could reduce corporation tax rates, allowing businesses to retain a greater share of their profits.
2. Until 2021, Ireland had a low corporation tax rate of just 12.5%.
3. Higher profits increase the possibility for investment in capital.
4. Better capital and technology improves productivity, allowing firms to produce more output per unit of input.
5. Businesses can therefore produce more output when all factors of production are fully employed.
6. This increases the productive potential of the economy, shown by a rightward shift in the LRAS curve.
7. Additionally, lower corporation tax incentivises foreign businesses to relocate to the UK, further increasing the productive potential of the economy.

Lower income taxes

1. Lower income tax rates increase the incentive for people to work as they get to keep more of their pay.
2. This incentivises people to enter the workforce, work overtime, or seek promotions.
3. It also attracts skilled workers from abroad, for example from Dubai, who may have otherwise chosen lower-tax economies.
4. This increases the quantity and quality of labour in the economy, boosting labour productivity (output per worker per hour).
5. This increases the productive potential of the economy, shown by a rightward shift in the LRAS curve.

Cut in welfare payments

1. The government could reduce welfare payments such as Jobseeker's Allowance, or increase the pension age.
2. This reduces the financial incentive to remain out of work, encouraging more people to enter the labour market.
3. The supply of labour increases, putting downward pressure on wages.
4. This reduces firms' average costs of production, allowing them to produce more output when all factors of production are fully employed.
5. This increases the productive potential of the economy, shown by a rightward shift in the LRAS 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.

However, supply side policies can also lead to more output, which over time can lead to more government revenue from income tax and corporation tax.

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 macroeconomic 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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