hi everyone let's now move away from demand side policies like monetary and fiscal policy let's focus on supply side policies which a to increase the productive potential of the economy not to do with demand now to do with aggregate supply to increase the productive potential of the economy basically to increase aggregate supply long run aggregate supply in the economy shift it right that's the intention here by doing so we must be increasing the quantity and quality of our factors of production Capital Enterprise land in labor or we're increasing the overall efficiency of markets so that bullet point there is very important that's why aggate Supply can shift to the right so make sure that one is fixed in your head supply side policies can be interventionist um they can actually promote the role of government in the economy or they can be free market promoting uh they can promote less government in the economy and markets to work more freely if they're interventionists they tend to start with government spending or reduce taxation so there can be dual effects as well there can be an effect on aggate demand in the short term as well but the main intention here is to increase aggre Supply increase the productive potential of the economy the maximum amount an economy can produce on a diagram the intention looks like this we're trying to shift aggregate supply to the right in doing so we're going to see an increase in the productive potential of the economy YF has increased from down here to now over here the economy can produce more potentially but also actual growth will increase y1 goes to Y2 and that's going to reduce unemployment in the economy inflation is going to fall cost push inflation more specifically is going to fall and therefore there is likely to be an improvement in the current account position there's going to be an increase in exports which is going to improve our trade position so all four key macro objectives of government are likely to improve so supply side policies from the offset look like a perfect policy in achieving the main macro objectives of government which is great and this diagram tells you that so what are the policies what are the supply side policies that can be used to do this well the way I teach this to my students is I say the target of supply side policies is life and what we're trying to do with life is to make it epic just like in real life we're trying to make our lives as epic as possible while supply side policy trying to do exactly the same thing they're try to make life epic what the heck do I mean by that well life is the target of supply side policy labor markets industry firms basically free markets and with free markets we're trying to make free markets more efficient so the F and the E go together so they're the target life is the Target and we're trying to make life epic so when we know what we're targeting we're either trying to make these markets more efficient we're trying to make them more productive we're trying to provide incentives we're trying to increase competition so we start with life that's our Target and then we look at Epic to what we're trying to do to these markets so let's take some examples let's look at Labor markets first supply side policies targeting labor markets well a supply side policy might be to improve Education and Training where does that lead us in Epic well that increases the productivity of Labor by improving Education and Training workers will be more productive therefore the quality of Labor increases thus increasing Supply so we go from our Target to Epic to then this major bullet point here either we increase the quantity and quality of factors of production in this case it was quality of Labor or we look at improving the efficiency of markets so that's the way we go right like that what about the reduction in income tax a reduction in income tax provides an incentive for potential workers to enter the labor force thus increasing the quantity of Labor see the little circle we're doing there the next two are all about increasing the efficiency of the market so abolishing the minimum wage or reducing Trade union power both of those reduce the cost of production for firms the reason why it's argued that minimum wages and uh strong trade unions fix wages in the labor market above the equilibrium wage rate which causes an excess Supply which causes inefficiencies basically so by abolishing the minimum wage by reducing the strength of trade unions we can bring wages back down to equilibrium wage rates in the economy which then reduces um cost of production for firms which makes the labor market more efficient which then increases the productive capacity of the economy in doing so so that was all about improving the efficiency of the labor market another Target of Labor markets is we can actually reduce unemployment benefits which uh incentivizes employment what about industry how can we target industry well governments can reduce corporation tax that's the supply side policy reducing corporation tax again reduces the cost of ruction for firms it gives them more retained profits which they might be able to use for investment when firms invest they buy capital goods which increases the quantity and quality of capital so this provides an incentive for firms to increase the quantity and quality of capital governments can provide subsidies to firms to promote research and development well that's an incentive now given to firms to uh innovate new products to advance technology basically to engage in research and development as cost of production for as they have now basically more money and that can increase the quantity and quality of capital as well that's increasing accurate Supply increasing the productive potential of the economy but we could also see free market promoting supply side policies like privatization and deregulation let's take privatization first privatization uh can work twofold privatization is when the government allows the private sector to run certain organizations it allows for more private sector activity which means now there is a profit Prof motive because the private sector gets involved means they're striving for maximum profits um but it also means that there is a greater incentive for competition so privatization provides an incentive for more competition to occur in the market and because of the profit motive in the that now exists there is a strive for greater efficiency so as a result there's going to be more efficiency in markets there is going to be an increase in accurate Supply as a result of more firms entering the market and a greater striving for more profit which is going to bring down costs which is going to increase efficiency deregulation as well by deregulating by reducing the level of regulation in the market that again is going to incentivize new firms to enter the market incentivize competition when new firms enter there's going to be a greater striving for more efficiency when new firms enter you want to try and get ahead of them you're going to cut costs you're going to try and be as efficient as possible which is again going to increase the productive potential of the economy so that one is improving the efficiency of maret market so these two are very much linked to efficiency by promoting competition though all right I hope now you understand how Supply C policies work there can be an aggate demand sign impact as well but the main impact is that we're trying to increase aggate Supply and by learning life and epic you're going to get to the main idea of increasing quent quality of factors of production and increasing efficiency hope that all makes sense now learn that very well you should all master supply side policies see you next time