Supply Side Policies in Economics

Overview

• Focus: Increase productive potential of the economy by targeting aggregate supply.
• Goal: Shift long-run aggregate supply (LRAS) curve to the right.
• Method: Improve quantity and quality of factors of production (capital, enterprise, land, labor) or increase market efficiency.

Types of Supply Side Policies

1. Interventionist Policies

   • Government spending
   • Reduced taxation
   • Short-term impact on aggregate demand but focus on long-term aggregate supply.

2. Free Market Policies

   • Less government intervention
   • Promote efficient market functioning.

Benefits of Supply Side Policies

• Increase in economy's productive potential.
• Actual economic growth (Y1 to Y2).
• Reduction in unemployment.
• Lower inflation, particularly cost-push inflation.
• Improvement in current account and trade position.
• Overall improvement in key macroeconomic objectives.

Target and Approach

• Target: LIFE (Labor markets, Industry, Firms, and Efficiency of free markets).
• Approach: Making life EPIC (Efficient, Productive, Incentives, Competition).

Examples of Supply Side Policies

Labor Markets

• Education and Training: Increase labor productivity and quality.
• Reduction of Income Tax: Increase labor force participation.
• Abolishing Minimum Wage / Reducing Trade Union Power:
  • Lower production costs.
  • Address inefficiencies by aligning wages with equilibrium levels.

Industry

• Reduction of Corporation Tax:
  • Lower production costs.
  • Increase investment in capital goods, enhancing capital quality and quantity.
• Subsidies for Research and Development:
  • Incentivize innovation and technological advancement.

Free Market Policies

• Privatization:
  • Increase private sector involvement.
  • Enhance competition and efficiency through profit motives.
• Deregulation:
  • Encourage new firm entry, increasing competition and efficiency.

Conclusion

• Supply side policies aim to increase the productive potential by improving factors of production and market efficiency.
• Although there might be short-term aggregate demand effects, the primary focus is on long-term aggregate supply.
• Understanding the concepts of LIFE and EPIC helps in mastering supply side policies.