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CIE IGCSE Economics Your notes

4.5 Supply-side Policy

Contents
4.5.1 Supply-side Policy Measures

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4.5.1 Supply-side Policy Measures

Your notes
Supply-side Policy Defined
Supply-side policies aim to increase the total supply (productive potential) of the economy
This is achieved by increasing the quality or quantity of the factors of production
It can be represented by an outward shift of the productive possibility curve
More consumer goods & more capital goods can now be produced using all of the available
resources

Outward shifts of a PPC show an increase in the total supply of an economy

The strategies used to increase total supply include education and training, labour market reforms,
lower direct taxes, deregulation, improving incentives to work & invest, and privatisation

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Supply-side Policy Measures

When successful, supply-side policies have the following effects on the government's Your notes
macroeconomic objectives
1. Economic growth: potential national output increases leading to higher real gross domestic product
(rGDP)
2. Inflation: a greater supply in the economy results in reductions in the prices of goods/services leading
to disinflation
3. Unemployment: this should fall as more workers are required to produce the higher levels of output
4. Current Account Balance: due to the increased supply, the prices of goods/services often decrease
which makes them relatively more attractive to foreigners - so exports increase & the current account
balance improves
5. Redistribution of income: this often worsens with the use of supply-side policies as wages fall &
government tax revenue has fallen too

Specific Types of Supply-side Policies

Supply-side Policy Explanation

Education & training Increasing government spending on education & retraining raises the
quality of the workforce
Increasing government spending on healthcare so that worker
productivity improves

Labour market reforms
Decreasing trade union power so wages can be decreased encourages
firms to hire more workers as they are cheaper
Decreasing minimum wages to lower costs of production encourages
firms to hire more workers as they are cheaper
Increased government spending on improving occupational mobility

Lower direct taxes Reducing income/corporation tax rates incentivises workers to work
harder (they keep more money for themselves) & provides firms with extra
funds which they can use to invest in new machinery/technology

Deregulation This is the process of removing government controls/laws from markets

in order to increase competition
Any regulation increases costs of production for firms & deregulation
decreases costs which may result in greater supply

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Improving incentives to Restructuring the unemployment benefits system to incentivise the

work & invest unemployed to seek work Your notes
Increased government spending on innovation increases the supply of
potential jobs in the economy
Direct support to firms (subsidies) increases output & promotes
international competitiveness

Privatisation Government firms are usually so big that private enterprise refrains from
trying to compete with them. Privatisation encourages new firms to enter
the market & compete, thus increasing the total supply in the economy

Strengths of Supply-side Policies

They increase the rate of growth of an economy
They reduce inflation
They often reduce unemployment
They often increase the value of net exports as an increase in total supply usually results in lower prices
leading to greater exports

Weaknesses of Supply-side Policy

The distribution of income worsens as labour market reforms & wage policies lower worker's wages
They are expensive to implement
There are significant time lags between government expenditure & seeing the benefits e.g. education
& training often take a long time
Due to the long-term nature, changes in government often result in changes to budgets & scope of
projects
Vested interests can result in less effective outcomes e.g. There are many examples of privatisation
occurring in such a way that the government's preferred bidders obtained an asset at a knock down
price

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Exam Tip
Your notes
There are some policy measures which may be a fiscal policy or a supply-side measure e.g. building
new schools requires immediate government spending (fiscal policy), but results in greater supply of
educational institutions in the economy (supply-side). In deciding which it is in any particular question,
decide whether the government is using it with the intention of increasing total demand or total supply

When evaluating supply-side polices in essay responses, demonstrate critical thinking by

acknowledging that privatisation has been used for so long that many economies have little left to
privatise.

Remember, the private sector will also be increasing supply in an economy (it is not only up to the
government) as they are incentivised to increase their profits.

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