• Supply-side policies?aim to shift?the?long-run aggregate supply (LRAS)
• There are two categories of supply-side policies
  • Interventionist?and?market-based
• Interventionist supply-side policies require?government intervention?in order to increase the?full employment level of output
  • These are mainly used to correct?market failure
• Market-based supply-side policies?aim to remove obstructions in the?free market?that are holding back improvements to the long-run potential
  • E.g. Setting up a regulator to?prevent monopolies?forming

• Broadly speaking, there are?five aims of supply-side policies
  • The overall aim is to increase the quantity/quality of the?factors of production

Market Based & Interventionist Strategies to Meet the Aims of Supply-side Policies

• Successful supply-side policies will increase the?long-run aggregate supply (LRAS)
  • This equates to an increase in the production possibilities of an economy
• The successful implementation can be illustrated on either a?Classical or Keynesian?diagram

A Classical diagram that illustrates the implementation of successful supply-side policy

A Keynesian diagram that illustrates the implementation of successful supply-side policy

Diagram Analysis

• E.g. Efforts to reduce?trade union power?have been successful
  • There is now less protection on wage levels
    • Wage levels fall
• Firms will now?hire more workers?& the?quantity of productive labour?in the economy has increased
  • This causes LRAS1?to increase to LRAS2
    • Output increases?from YFE?to YFE1
    • Average?price levels?fall from AP1→AP2

Strengths of Supply-side Policies

• They increase the?rate of growth?of an economy
• They reduce?average price levels
• They reduce?unemployment
• They often increase the value of?net exports
• Improvements in Infrastructure can raise the quality of life for all citizens

Weaknesses of Supply-side Policy

• The?distribution of income?worsens as labour market reforms and wage policies lower worker's wages
• They are?expensive?to implement
• There are significant?time lags?between expenditure & seeing the benefits
• Due to the long-term nature,?changes in government?often result in changes to budgets & scope of projects
  • The end result may be?less effective?than it could have been
• Vested interests?can result in less effective outcomes e.g. There are many examples of privatisation occurring in such a way that the government's preferred bidders obtained an?asset at a knock down price
  • Often the preferred bidders were not necessarily the most?efficient?firms