Supply-side policies raise what the economy can produce, not just what people spend.
What supply-side policies aim for
Long-term growth
More productive capacity: LRAS shifts right.
Competition and efficiency
Firms cut costs and improve to survive.
Flexible labour markets
Lower labour costs, so firms hire more.
Lower inflation
Lower costs keep prices down: exports compete better.
More innovation
Lower costs leave firms more to invest in new ideas.
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Market-based policies let markets work more freely.
Three kinds of market-based policy
More competition
Deregulation, privatisation, free trade, anti-monopoly rules. The UK sold BT in 1984 and British Gas in 1986.
Freer labour markets
Weaker unions, lower unemployment benefits, no minimum wage. Germany's Hartz reforms (2003-2005) cut benefits.
Stronger incentives
Lower income, business and capital gains taxes. Ireland's corporation tax is 12.5%.
The points to remember
- Write it like this: "Market-based supply-side policies increase competition and incentives, so firms become more efficient and LRAS shifts right."
- Draw LRAS shifting right; AD and SRAS are not needed.
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Some supply-side policies also change demand.
A tax cut works on both sides
Demand side: now
Households keep more income and firms more profit: C and I rise, AD shifts right.
Supply side: later
Higher rewards for work and investment: more capital and effort, LRAS shifts right.
Remember it as: Supply-side policy: more capacity, lower costs, and sometimes more spending too.
Quick reminder
- Axes: Average price level up the side, Real GDP along the bottom
- Curves: AD with SRAS1 and SRAS2 when costs fall; AD1, AD2, LRAS1 and LRAS2 when AD moves too
- Marks: PL1 and PL2, Y1 and Y2; Yf1 and Yf2 on LRAS
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
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When a policy changes spending too, show both shifts: AD first, then LRAS.
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Paper 1 asked this in May 2022, as part (a) for 10 marks.
Explain how supply-side policies may increase competition in domestic markets and improve international competitiveness.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |