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Supply Side Policy

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by

Sriram Sami

on 30 April 2010

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Transcript of Supply Side Policy

Supply Side Policy Done By:
Denise Tan
Sriram Sami
Phan Thuy Duong
Leow Wei Kai
Amanda Kwok Done By:
Denise Tan
Sriram Sami
Leow Wei Kai
Phan Thuy Duong
Amanda Kwok Definition:

Supply side policy can be defined as a set of measures
designed to raise productive capacity and so increase
aggregate supply by making labour and product markets work better.
What are Supply-side Policies? mainly micro-economic policies
designed to improve the supply-side
potential of an economy
make markets and industries operate
more efficiently
contribute to a faster rate of growth of real national
output
Main Purpose Achieve sustained economic
growth without a rise in
inflation.
Prerequisites Must also be a
high enough level
of aggregate demand Approaches to the Supply Side Policy Product market Labour Market Aims Of Supply
Side Policy Improve incentives for people to search
for and find work
Increase the occupational and
geographical mobility of labour to
reduce structural unemployment

Increase the productivity of labour and
capital inputs to raise the trend growth
rate

Increase capital investment and research and
development spending by firms.

Stimulate inflows of overseas investment to boost real GDP and employment

Increase business efficiency by promoting more competition within markets

Stimulate a faster pace of invention and
innovation throughout the economy
the drive growth and improve dynamic
efficiency
Where goods and services are produced and sold to consumers

Instruments involved in Supply-side Policy Labour Market
A factor market where labour is
bought and sold
Policies are designed to increase competition and effiencency If productivity increases, can produce more with a limited amount of goods,
thus shifting the LRAS
curve to the right Privatisation Involves selling state owned assets
to the private sector Aims to Break up monopolies Create more competition
(leads to lower prices
and better quality of
goods/service.) Deregulation Of Markets refers to the opening up of markets to greater competition. Aims Increase market supply
(drives prices down) Widen the range
of choice available to
consumers. Improve cost efficiency
from producers Toughening Up Competiton Policy Toughens competition between companies - greater competition Forces businesses to be more effective, by Efficiently making use of scarce resources
Reducing costs of production
Reducing cost passed on to consumers
Intervenes to curb some market faliures that result from a monopoly Such as Price Fixing Cartels Free International
Trade Allows foriegn companies to enter country Causes higher competition A catalyst for improvements in cost and lowered prices for consumers Encourage small business
start-ups / entrepreneurship Small businesses of today can be
large businesses of tomorrow,
increasing real national ouput employing more workers and contributing
to innovative behaviour can have positive spill-over effects in other industries. Could:
1.promote an entrepreneurial culture
2.Increase the rate of new business start-ups.
Capital investment and
innovation Capital spending by firms adds to
aggregate demand (C+I+G+(X-M))
but also has an important effect
on long run aggregate supply. Tax relief on research and development
Reductions in the rate of corporation tax
These policies are designed to improve the quality and quantity of the supply of labour available to the economy. Seek to make the labour market more flexible So that it is better able to match the
labour force to the demands placed upon it by
employers in expanding sectors thereby reducing the
risk of structural unemployment. Trade Union Reforms

Increased Spending on Education and Training

Income Tax Reforms and the Incentive to Work

Unemployment benefits Traditional legal protections enjoyed by the trade unions have been removed

Reduces the chances of a strike Employees reduce the expectation of working conditions

Increased employment
improves workers’ human capital reduce structural unemployment
well-educated workforce acts as a magnet for foreign investment in economy
improve labour productivity and increase AS
lower rates of income tax provide a short-term boost to demand
improve incentives for people to work longer hours or take a new job
improves output

Create incentives for people to work
Increase the supply of labour and the productive potential of the economy.
Effects of supply-side improvements in the economy Benefits of Supply Side Policies 1. Lower inflation
2. Lower unemployment

3. Improving economic growth

4. Improve trade and balance of payment Effectiveness Of Supply Side Policy Theoretically - Only Supposed to Increase AS Reality - Causes Small Fluctuations in AD E.g. Privatisation Efficency Increases GPL Decrease Production is increased However, private corporations might use profits for investments, not give to govt. AD Increases HOWEVER!
Effect Of AD on SSP occurs only to
small extent EFFECT OF AS STILL
FAR OUTWEIGHS AD LONG TERM Very Effective Solves
unemployment
(sometimes) fiscal surplus
GPL and hence inflation,
Without the usual side effects! Limitations Although SSP is effective in long run - Results need an extended period of tome Not very useful in situations where macroeconomic problems have to be solved quickly and efficiently. Benefits in a perfect scenario 1.Help to solve unemployment problems.

2.Help to improve living standard

3.Help to increase the peoples’ incentives and will to work

4.Increase productivity and quality of goods and services

5.Help to ensure economic growth with minimal inflation

6.Prevent stagflation
Drawbacks in a perfect scenario
1.Subsidies to poorly invested companies
may cause them to continue producing
inefficiently.
2.The government may invest tax payer’s
money into extravagant and unprofitable
projects. 3.Companies may not invest as much due
to low potential investment return,
and not because of inefficiency.

4.Inclination to inflation 5.Constraints in the government’s power, fluctuations in the economic conditions etc. causing it to be difficult to sustain. 6.If the AS supply curve shifts left (decreases) due to costs increases, inflation and unemployment would both increase.
References:
http://www.economicshelp.org/macroeconomics/economic-growth/supply-side-policies.html
http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
http://www.s-cool.co.uk/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies.html
Product Markets Argued that the private sector is more
efficient in running business because
they have a profit motive to reduce costs
and develop better services to keep up with
competition.
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