Supply side policies are policies that improve the supply-side of the economy increasing its efficiency and thereby resulting in economic growth. Supply side policies can act in the product and labour markets
Examples of Supply side policies:
- Trade union reforms
- Increased expenditure on training and education
- Changes in taxation
- Changes to welfare system
- Privatisation
- Deregulation Free trade
- Incentives for small businesses
Supply Side Policies and the shift outwards of the Long Run Aggregate Supply curve
Supply side policies cause economic growth as they cause the LRAS to shift outwards, increasing the potential output of the economy.
If the economy is operating near full potential increases in aggregate demand can cause cost push inflation, by the LRAS curve shifting outwards this inflationary pressure is reduced.
As supply side policies can cause the LRAS to shift outwards they can lead to a fall in unemployment levels. Many supply side policies concentrate on the labour market and increase skills for workers which help reduce structural unemployment in the economy
As the LRAS shifts outwards businesses will have lower average costs as productivity has increased. Lower costs mean that businesses are able to compete more internationally therefore making the balance of payments more healthy.
