Supply-side policies

What are supply side policies?

Supply side policies are policies the government can use to try to increase supply in the economy. A right shift in supply leads to lower prices and higher output which is good for the economy because it increases GDP and makes UK products more competitive.

Supply side policy How it helps meet economic objectives
Infrastructure development Better transport links, power and digital infrastructure benefit all firms in the country who can make use of these to be more efficient. This lowers costs for firms allowing them to supply more at each price.
Education More educated workers means a more productive workforce. This means more output in the same time lowering average costs and meaning more can be supplied at each price.
Reducing direct taxes By lowering taxes like income tax more workers may be inclined to supply their labour. This can mean working overtime or going for promotions. The more labour supplied the more that can be made. By reducing corporations tax they may attract firms to invest and expand so they can supply more as they keep more of the profits from doing so.
Reducing benefits The notion behind this idea is that some people only don't work because the gap between benefits and low wages is not enough and if it were larger then more people might choose to work instead of receive benefits.
Reducing the power of trade unions Trade unions argue on behalf of workers for better pay and conditions. Disputes can lead to strikes and other action that affects productivity. If unions have less power then wages may be lower, decreasing costs for firms and allowing them to supply more at each price. Disputes that affect production would also be reduced.
Promoting competition The competitions and markets authority or CMA for short is responsible for enforcing competition and consumer law and promoting competition. They also take decisions on whether firms can merge.
Privatisation The idea behind this is that private firms will be more efficient than government departments because of competition.

Evaluate the costs and the benefits of supply side policies

Costs of supply side policies Benefits of supply side policies
Infrastructure and education can be expensive to improve. This also means there is a large opportunity cost with these decisions to. What should be funded can be divisive. As education levels increase workers are more productive and firms will be more willing to employ them. More productive workers often get a higher pay so incomes will rise too.
Benefits may have time lags. Infrastructure projects take a long time to deliver, education and training may take years to produce fully trained workers and the benefits of privatisation may not be seen until the new competitive market gets going with a few competitive firms. Improved infrastructure and lower union power can help keep costs down and this means firms can have lower prices and be more competitive internationally. This can lead to more exports and less imports and so a better balance of payments.
Unions and workers may well resist reducing the power of unions as they provide a voice to workers. This could lead to more not less industrial conflict. The improved efficiency from better educated workers and better infrastructure helps keep costs down and reduces pressure from cost-push inflation.
Lowering taxes means there is less money for the government to use to fund other areas without increasing debt. In addition some people may work less as they can do this and maintain their standard of living. The government can target funding into areas where it is most needed. This could be infrastructure projects in deprived or regional areas or funding to target specific skill shortages such as nurses or teachers.
Charities and other organisations would not be happy with lowering benefits which would impact people's standard of living and increasing poverty and the inequality of income.
Not all deregulated industries have ended up being more efficient after deregulation.

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Questions

Explain how improving education can improve supply in the economy. (2 marks)


A more skilled workforce(1) is more productive increasing output.(1)

Explain how reducing direct taxes can increase supply in the economy. (2 marks)


If you reduce corporations tax(1), then firms have a greater incentive to invest as they get to keep more of the profits.(1) or

If you reduce income tax, workers are more willing to work leading to lower labour costs and more people employed(1) meaning more output(1)

Explain how reducing benefits can increase supply in the economy. (2 marks)


The idea is that some peope don't work because the gap between wages and benefits is not enough(1) so this would encourage more people to work leading to greater output.(1)

Explain how privatisation can increase supply in the economy. (2 marks)


Privatisation of an industry opens it up to competition(1) which is thought to be more efficient leading to higher output.(1)

Case study/Scenario

A member of the government has recently suggested that benefits should be reduced in order to ancourage more people off benefits and into work.

Evaluate the costs and benefits to the UK of reducing benefits to improve the supply side. (6 marks)


Sample answer:

If benefits are reduced then the gap between benefits and wages is larger.{AO2} Some unemployed people may feel benefits is enough and they don't want to work but this change may make it seem more worthwhile.{AO3a} leading to more people in the workforce and therefore greater output.{AO3a}

However charities that look after the poorest in society woud criticise such a move{AO3b}and point out it could lead to increased poverty.{AO3b}

It would depend on how many people are actually on benefits because they don't want to work and how encouraged they are to work by the changes. it may just as easily lead to an increase in crime.{A03b}


Case study/Scenario

The government has been spending money to recruit health workers with a campaign involving radio, video on demand, social media and a new TV advert showcasing the work of current NHS staff, in order to recruit nurses. They have also made available annual £5000 living cost grants to many student health professionals and an additional £3000 available to people studying in high demand areas such as mental health nursing. The Government aims to attract teenagers preparing to apply for university and career switchers, encouraging them to find out more about NHS careers and register to receive advice by email.

Evaluate the costs and benefits of spending money on recruiting health workers. (6 marks)


Sample answer:

By spending this money the government is able to target its ongoing shortage of health workers.{AO2} When the number of workers increases so to will the quality of service in the NHS{AO3a} leading to improved welfare for UK citizens.{AO3a}

The cost of this is high and some will feel workers would be attracted anyway and this money could be better spent elsewhere.{AO3b} And if the scheme targets students applying for university it will be a long time before the effects are felt.{AO3b}

If the drive is successful then it will probably be money well spent but it will still take a long time to see the benefits.{AO3b}


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