Edexcel A Level Economics A:复习笔记2.6.3 Supply-side Policies

• Supply-side policies aim to shift the long-run aggregate supply (LRAS)
• There are two categories of supply-side policies
  • Interventionist and market-based
• Interventionist supply-side policies require government intervention in order to increase the full employment level of output
  • These are mainly used to correct market failure
• Market-based supply-side policies aim to remove obstructions in the free market that are holding back improvements to the long-run potential
  • E.g. Setting up a regulator to prevent monopolies forming

• Broadly speaking, there are five aims of supply-side policies
  • The overall aim is to increase the quantity/quality of the factors of production

Market Based & Interventionist Strategies to Meet the Aims of Supply-side Policies

• Successful supply-side policies will increase the long-run aggregate supply (LRAS)
  • This equates to an increase in the production possibilities of an economy
• The successful implementation can be illustrated on either a Classical or Keynesian diagram

A Classical diagram that illustrates the implementation of successful supply-side policy

A Keynesian diagram that illustrates the implementation of successful supply-side policy

Diagram Analysis

• E.g. Efforts to reduce trade union power have been successful
  • There is now less protection on wage levels
    • Wage levels fall
• Firms will now hire more workers & the quantity of productive labour in the economy has increased
  • This causes LRAS1 to increase to LRAS2
    • Output increases from YFE to YFE1
    • Average price levels fall from AP1→AP2

Strengths of Supply-side Policies

• They increase the rate of growth of an economy
• They reduce average price levels
• They reduce unemployment
• They often increase the value of net exports
• Improvements in Infrastructure can raise the quality of life for all citizens

Weaknesses of Supply-side Policy

• The distribution of income worsens as labour market reforms and wage policies lower worker's wages
• They are expensive to implement
• There are significant time lags between expenditure & seeing the benefits
• Due to the long-term nature, changes in government often result in changes to budgets & scope of projects
  • The end result may be less effective than it could have been
• 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
  • Often the preferred bidders were not necessarily the most efficient firms