Overview
This lecture outlines supply-side policy measures in IGCSE Economics, explaining their aims, specific types, effects, strengths, and weaknesses on the macroeconomy.
What Are Supply-side Policies?
- Supply-side policies aim to increase the total productive capacity (potential output) of the economy.
- They work by improving the quality or quantity of factors of production.
- These policies cause an outward shift of the production possibility curve (PPC), meaning more goods can be produced.
- Key strategies include education and training, labour market reforms, lower direct taxes, deregulation, incentives, and privatisation.
Effects of Successful Supply-side Policies
- Economic growth rises as potential national output and real GDP increase.
- Inflation falls because greater supply reduces prices, leading to disinflation.
- Unemployment decreases as more workers are needed with higher output.
- Current account balance improves since cheaper goods boost exports.
- Income redistribution may worsen, as lower wages and tax revenues can increase income inequality.
Main Types of Supply-side Policies
- Education and training: improves workforce quality and productivity.
- Labour market reforms: reduce union power and minimum wages, increase workforce flexibility.
- Lower direct taxes: motivates work and investment by increasing after-tax income for individuals and firms.
- Deregulation: removes government controls to reduce costs and increase competition.
- Improving work incentives: restructuring benefits and subsidising firms encourages job-seeking and innovation.
- Privatisation: selling state firms increases competition and total supply.
Strengths of Supply-side Policies
- Promote higher economic growth rates.
- Help control inflation.
- Reduce unemployment.
- Increase net exports due to lower prices for exported goods.
Weaknesses of Supply-side Policies
- Can worsen income distribution (greater inequality, lower wages).
- Costly for governments to implement.
- Results often take a long time to appear (time lags).
- Policy changes may occur with new governments, disrupting projects.
- Vested interests can undermine effectiveness, e.g., problematic privatisations.
Key Terms & Definitions
- Supply-side policy — policies designed to increase the productive capacity of the economy.
- Production possibility curve (PPC) — a graph showing the maximum output combinations of goods an economy can produce.
- Disinflation — a reduction in the rate of inflation.
- Privatisation — transferring ownership of state enterprises to the private sector.
- Labour market reforms — changes to regulations to make hiring and working conditions more flexible.
Action Items / Next Steps
- Review the strengths and weaknesses of each supply-side policy for exam essays.
- Practice identifying supply-side vs. fiscal policy intention in case studies.
- Complete related exam questions and flashcards on supply-side policy measures.