Summary
Supply-side policies aim to increase the economy's productive capacity by shifting the long-run aggregate supply (LRAS) curve to the right. These policies focus on improving productivity and efficiency in production processes and factor markets.
- Supply-side policy — measures to increase productive capacity and shift LRAS right. Example: Investment in education and infrastructure.
- Long-Run Aggregate Supply (LRAS) — the total supply of goods and services that an economy can produce when using its resources fully and efficiently. Example: A rightward shift in LRAS indicates increased productive capacity.
- Productivity Improvement — enhancing the efficiency of production processes and factors of production. Example: Training programs that improve worker skills.
- Infrastructure Development — investment in transport, power, and communication networks to reduce production costs. Example: Building new highways to improve logistics.
- Technological Improvement — advancements that increase output and reduce costs. Example: Robotics in manufacturing.
- Tax Cuts — reducing taxes to encourage investment and workforce participation. Example: Lower corporate taxes to boost business investment.
Exam Tips
Key Definitions to Remember
- Supply-side policy
- Long-Run Aggregate Supply (LRAS)
- Productivity Improvement
Common Confusions
- Confusing supply-side policies with demand-side policies
- Misunderstanding the impact of infrastructure on short-term vs. long-term growth
Typical Exam Questions
- What are supply-side policies? Measures to increase productive capacity and shift LRAS right.
- How do supply-side policies affect employment? They increase skills and mobility, reducing unemployment.
- What is the role of technological improvement in supply-side policies? It increases output and reduces costs.
What Examiners Usually Test
- Understanding of how supply-side policies shift the LRAS curve
- The impact of supply-side policies on national income and employment
- The effectiveness of different supply-side policy tools