The role of supply side policies
This page explains what economists mean by supply side policies and considers the role that they play in any successful economy.
What are supply side policies and how do they play a role in maintaining a modern successful economy?
Lesson time: 45 minutes
Explain that supply-side policies aim at positively affecting the production side of an economy by improving the institutional framework and the capacity to produce (that is, by changing the quantity and/or quality of factors of production).
State that supply-side policies may be market-based or interventionist, and that in either case they aim to shift the LRAS curve to the right, achieving growth in potential output.
Supply side policies - policies aimed at increasing aggregate supply (AS), a shift from left to right. They enhance the productive capacities of an economy while improving the quality and quantity of the four factors of production. Successful policies can lower the natural rate of unemployment and can contribute to long-term economic growth without increasing the rate of inflation.
Pillars of supply side policy - tax policy, regulatory policy, and monetary policy.
Privatisation - the transfer of assets from the public (government) sector to the private sector.
The activities on this page are available as a PDF at: Role of supply side policies
What are the secrets to a successful economy? Why are some nations more successful than others?
Start by watching the following video which explains how to make a country richer. After the video rank your own nation according to the criteria described in the video. What additional measures could your home country, or the country where you study, take to help the country develop?
The diagram to the right illustrates the long run average supply curve, represents the productive capacity of the country, at any given time, given the factors of production available in the economy.
(a) Illustrate on this diagram, the impact of a government diverting extensive resources towards infrastructure and human capital.
(b) Explain why this policy might be more popular with many economists than demand side policies?
(c) Illustrate the effect of successful supply side policies on a PPF diagram?
(d) Describe some of the weaknesses of supply side policies?
Finish the lesson by enjoying this short video illustrating the productivity of labour over time.