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Supply side policy notes
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Detailed government supply side policy notes.Interventionist and free market approach.
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IGCSE Economics 0455 Notes (Chapter 1-2) 2023
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Supply Side PoliciesMeaning of Supply-Side Policy, in Terms of its Effect on LRAS Curves
These are policies that focus on increasing Aggregate supply, by improving the
workings of product and factor markets. By establishing a framework of conditions
that lead to greater economic efficiency, supply side policies increase the economy’s
aggregate supply potential, shifting the aggregate supply curve to the right.
Supply-side policies are aimed at affecting the aggregate supply as can be seen in
Figure 1. The aim is to shift the long run supply curve to the right, LRAS1 to LRAS2,
leading to an increase in real growth and thus employment, while, at the same time,
resulting in a fall in the price level.
Increasing the supply potential
reduces pressure on the price
level, despite increased AD the
economy can enjoy more output
and less inflation.
Figure 2: Supply Side Policy Shifting the PPC Outwards
In Figure 2 it is shifting the production possibility
curve outwards.
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, • Supply-side policies are designed to make markets and industries operate more
efficiently and contribute to a faster underlying-rate of growth of real national
output
• Successful policies have the effect of shifting the LRAS curve (or the PPC) to the
right leading to a rise in potential output as shown in figure 1.
• Most governments believe that improved supply-side performance is the key to
achieving sustained economic growth without causing a rise in inflation.
Supply-Side Policy Objectives
Increasing productivity and productive capacity: supply-side policies are largely
aimed at improving productivity and productive capacity. As can be seen from this,
they are essentially microeconomic measures used to influence the macro-economy.
Productivity is the quantity of goods and services produced per unit of input. By
increasing productivity, therefore, the real output of the economy can be increased so
that AS has shifted outwards without any increase in the price level.
• Improve incentives to look for work and invest in people’s skills
• Increase labour and capital productivity
• Increase occupational and geographical mobility of labour to help reduce the
rate of unemployment
• Increase investment, research and development spending
• Promoting more competition and stimulate a faster pace of invention and
innovation to improve competitiveness
• Provide a platform for sustained non-inflationary growth
• Encourage the start-up and expansion of new businesses / enterprises
especially those with export potential
• Improve the trend rate of growth of real GDP
Supply-side reforms can affect both short-run and long-run aggregate supply – but
the focus is usually on LRAS. Timelines involved with supply-side reforms can be
long.
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