The main objectives of supply-side policies are to increase the productivity and productive capacity of an economy, which can lead to sustained economic growth and higher living standards. These policies focus on the supply-side of the economy, i.e., increasing the factors of production and improving their efficiency

• Increasing productivity: Supply-side policies aim to increase productivity by improving the efficiency of the factors of production, such as labor and capital.
  • This can be achieved by investing in education and training, improving the infrastructure, and encouraging innovation and research and development.

     

• Increasing productive capacity: Supply-side policies also aim to increase the productive capacity of the economy by increasing the availability of factors of production, such as labor and capital.
  • This can be achieved by encouraging investment in new technologies, increasing the number of skilled workers, and reducing barriers to entry for new businesses.

     

• Encouraging entrepreneurship: Supply-side policies aim to encourage entrepreneurship and innovation by reducing regulatory barriers, providing tax incentives for investment, and promoting a culture of risk-taking.

   

• Reducing costs: Supply-side policies aim to reduce the costs of production by improving the efficiency of the factors of production and reducing regulatory and tax burdens on businesses.

• Investment in human capital: This involves training and educating workers to increase their skills and knowledge, making them more productive and able to contribute more to the economy.

   

• Investment in physical capital: This involves improving the infrastructure of an economy, such as roads, bridges, and ports, to increase the efficiency of transportation and communication.

   

• Support for technological improvement: This involves providing incentives for businesses to invest in new technologies that can increase their efficiency and productivity, such as tax credits for research and development.

   

• Reducing barriers to entry: This involves reducing regulatory burdens and other barriers to entry for new businesses, making it easier for them to enter the market and compete with established firms.

   

• Tax and regulatory policies: These policies can be used to reduce the cost of doing business, such as by reducing corporate tax rates or streamlining regulatory requirements.

   

• Labor market policies: These policies can be used to improve the efficiency of the labor market, such as by reducing barriers to hiring and firing, promoting labor mobility, and reducing the cost of labor.

AD/AS analysis of the impact of supply-side policy on the equilibrium national income and the level of real output, the price level and employment

1. An increase in productive capacity shifts the aggregate supply (AS) curve to the right.
   • This is because, as productivity and efficiency increase, the economy can produce more output with the same amount of resources, resulting in an increase in the potential output of the economy.
2. The increase in potential output leads to an increase in the equilibrium level of real output and a decrease in the price level.
   • This is because the increased supply of goods and services puts downward pressure on prices, while the increased output leads to an increase in income and employment.
3. In the long run, the increase in productive capacity also leads to an increase in the potential output of the economy, which shifts the long-run aggregate supply (LRAS) curve to the right. This results in a further increase in the equilibrium level of real output and a decrease in the price level.
4. The net effect of supply-side policies is to increase the productive capacity and potential output of an economy, leading to sustained economic growth and improved living standards in the long run.

Factors that affect the effectiveness of supply-side policies include

• Time lag: There may be a time lag between the implementation of supply-side policies and their impact on the economy. For example, it may take several years for new infrastructure projects to be completed and for the benefits to be realized.
• Cost: Implementing supply-side policies can be expensive, and the cost of implementation can vary depending on the specific policy. Some policies may require significant investment in infrastructure or research and development, which may take years to pay off.
  • While training and education programs can improve the skills and productivity of workers, they can be costly to implement and may not always lead to the desired outcomes.
• Implementation: The quality of implementation of supply-side policies can affect their effectiveness. If policies are not implemented effectively, they may not achieve the desired outcomes.
• Business confidence: The level of business confidence in the economy can affect the effectiveness of supply-side policies. If businesses are confident about the future prospects of the economy, they may be more willing to invest in new capital and to take on additional workers.
• External shocks: External factors, such as changes in global commodity prices or economic downturns in other countries, can affect the effectiveness of supply-side policies.
• Problems associated with specific policy
  • While training and education programs can improve the skills and productivity of workers, they can be costly to implement and may not always lead to the desired outcomes. In some cases, workers may not be interested in the training being offered, or the skills they learn may not be in demand by employers.
  • Removing regulations on businesses can reduce their costs and increase their competitiveness, but can also lead to negative outcomes such as increased pollution or decreased worker safety. In addition, some regulations may be necessary to protect consumers or maintain a level playing field in the market.