Chapter 19.
Unit 2.6
SUPPLY - SIDE POLICIES
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA

SUPPLY – SIDE POLICIES
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Supply – side policies are combination of
government-led and free market policies designed to
increase the productive capacity of the country.
 Beyond 1980s, new perspective emphasis on Money
and inflation control (Monetarist approach). Emphasis
on the SUPPLY SIDE.
 Appeal -> improve overall macroecon obj. Good
policies encourage productivity creating more/ better
factors of pdn.
 Productive surplus – growth is the logical outcome .
 Increasing LRAS manages to increase the economy
without generating inflation. Drawback on the
demand-side.
 Answer on of the most serious challenge of
macroecon policies -> STAGFLATION - is a situation
in which the inflation rate is high, the economic
growth rate slows, and unemployment remains

CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Stagflation .
 Movement of AD ->
Expansion -> Further
inc PL
Contractionary ->
Further Recession
 Successful supply-
side policies shift
SRAS to the right
easing PL and
encouraging
recovery to full
employment.
LRA
S

Types of supply – side policies
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 SS policies shift LRAS to the right
increasing overall productive capacity of
the economy. More o/p . Higher std of
living and more empl.
 Types -> Govt based and Market-based
 Govt intervention -> provide capital G/S
where it believes the market has failed to
do so.
 Market based -> unleash full power of
open markets to improve competition,
open labor markets, and create better
incentives.

Market based supply – side policies:
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Origin: Milton Friedman - thought about Sm ->
NEO Classical economics -> fiercely criticized
heavy regulation of markets. Govt ownership of
major industries and protectionist policies.
 Intended to reduce govt intervention allowing free
mkt to increase efficiency and improve incentives.
 Aimed to open up competition, free up mkts from
govt involvement and return influence to the pvt
sector.
 US and UK politicians -> decisive and unpopular
stances privatized and shrank big industries –
increased strike and unemp.

Types of market based supply – side
policy
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Policies to encourage competition.
 Labor market reforms
 Incentive related policies.

Policies to Encourage
Competition
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Open mkt for greater competition. More competition –
harder work – innovation – lower prices – better
quality – earn money and win customers.
1. Deregulation: reduce bureaucracy and costs of
complying with govt rules esp those with regard to
negative externality and pdt quality/ quantity, worker
safety and pollution control.
2. Anti – monopoly regulation: anti – trust laws.
Prevent / dismantle monopolies . More flexibility in
o/p and prices.
3. Privatization: lower costs and prices. Regulation ->
unnecessary empl and inefficient.
4. Trade liberalization -> applied free-trade . Oppose
tariffs, quotas and subsidies tht encouraged depend
on govt. encourage redn of trade barriers and open
competition.

Labor market reforms
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
1. Reducing trade union power -> decrease wage
setting power. More workers move freely.
Increase empl.
2. Reducing unempl benefits -> smaller and
shorter in duration encourage workers to seek
employment
3. Ending the min wage -> price floor for labor .
Surplus of worker. Higher wages reduces profits
for firms. Lower supply and empl.

Incentive related policies:
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Reducing business tax and
IT encourage pdtivity.
1. Reducing IT -> increase
disposable income.
Greater incentive to work.
Arthur Laffer -> lower
taxes at the high end of the
tax rate raises tax
revenues. lesser tax
stimulate work resulting
income increase tax
revenue.
2. Reducing business and
capital gains taxes -> cut
costs. Produce more. Inc
empl

Interventionist supply side
policies:
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Require some kind of govt action to improve
factors of pdn.
Most require immediate spending which will
stimulate AD.
1. Investment in Human capital
2. Investment in new technology
3. Investment in infrastructure
4. Industrial policies

Investment in Human capital
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Human capital – labor and entrepreneurship.
1. Education -> public good provided by the govt.
learning rewarded with jumps in income of those so-
educated. Improves skills and productivity. High
national income.
2. Training -> job training centres established by the
govt. productive employees and enhance economic
growth.
3. Health services -> when public health is poor.
Student and worker absenteeism. Improved
Healthcare improve pdtivity.
the above three have an immediate effect on AD . But, a
lingering effect on the LRAS pushing it out by
improving labor and Entrepreneurship.

Investment in infrastructure
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Building of large scale public projects – ports,
highway systems, bridges, communication
networks, power and water systems. Expand
capital base and increase LRAS in the process.
 Port – easier to import / export goods.

Industrial policies
CPS GLOBAL SCHOOL - IB ECONOMICS -
MONICA
 Govt support certain industries -> enable the
country to gain an edge or has long term good
prospects.
1. Financial incentives -> support with reduced
taxes. Subsidized loans, direct subsidizes.
Reduce costs. Improved pdn.
2. Protection for ‘infant industries’ -> industries
potentially competitive. Too small to enjoy econ
of scale. Govt protects thro tariff or quotas to
keep foreign competition out till it is large and
developed.