IB Economics Chapter 12 - Supply-Side Policies
Terms in this set (17)
Supply side policies (generally)
Government attempts to increase productivity and increase Aggregate Supply (AS).
Market-based supply-side policies
Policies implemented by the government, aimed at encouraging production and consumption by the free market and thus stimulating economic activity (AS) without increased government intervention.
Market Based Policy: Deregulation of industry
The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. It ideally leads to:
- Lowering the costs among producers
- Encouraging increased production, a larger number of workers hired and allowing an industry to charge less for goods.
- Uber in the taxi market.
- Airbnb in the hotel market.
Market Based Policy: Privatise public industries
The transfer of ownership, property or business from the government to the private sector. It ideally leads to:
- Increase competition and efficiency
- Lower costs
- Increase employment
- Commonwealth Bank of Australia
Market Based Policy: Labour Market Reform
The reduction or elimination of minimum wages, unemployment and health benefits for the nation's workers. In Australia, it is heavily regulated by the government and difficult to enact due to political, union and public resistance. It ideally leads to:
- Increased wage competition among workers.
- Encourage more workers to take jobs at lower wages
- Lowers costs for firms
Interventionalist supply-side policies
Policies that involve a greater role of government but lead to greater productivity or lower costs, encouraging a higher level of production, economic growth and employment.
Interventionalist Policy: Infrastructure investments
Improved roads, bridges, tunnels, mass transit, communication or high-speed internet. It ideally leads to:
- Lower costs among private sector producers.
- An increased level of economic activity in the private sector.
Interventionalist Policy: Education
Investments in the nation's labor force through improved education and skills training. It ideally leads to:
- Make the producers more productive
- Lead to more employment and output
Interventionalist Policy: Government research and development investment
Research funded by government agencies can lead to scientific breakthroughs that ultimately increase efficiency and productivity in the private sector.
A reduction in the rate of inflation - this can be good and bad depending on the circumstances.
Reasons the AD curve slopes downwards
1) Wealth effect
2) Interest rate effect
3) International effect
Note: Mirco demand curve is downwards because of income substitution effect, NOT the things above.
Causes for outwards shifts in AD curve
ALL ABOUT INCREASING C, I, G and (X-M).
Consumption (C): STABLE
Planned investment (Ip): (MOST) UNSTABLE
- Increased business confidence
- New technology
- Decreased interest rates
Government spending (G): UNSTABLE
- Expansionary fiscal policy i.e. increasing spending, decreasing tax or both.
Net Exports (X-M): UNSTABLE
- China boom
Reasons the AS curve slopes upwards
1) Supply more at higher price level to maximise profit.
2) More firms will enter the market when price is higher
Same reasons across micro and macroeconomics.
Causes for outwards shifts in AS curve
ALL ABOUT DECREASING COSTS TO FIRMS:
- Raw materials
- Wages: do they change?
// Keynesian: No because they never fall; they are sticky downwards due to minimum wage laws and union power.
// Neo-classical: In the long run (LRAS) governments can decrease the minimum wages, decrease unemployment benefits (and make it harder to get them).
Parts of the AS curve
Keynesian stage: flat
Intermediate stage: curving upwards
classical stage: vertical
No LRAS in KEYNESIAN model, RLS is a NEO-CLASSICAL concept.
AD shocks according to the Keynesian model
- Yf - Y1 - SR + LR = equilibrium position
- Planned spending = actual spending
- Distance Yf-Y1 = output gap
- Whenever there is a lack of AD in the economy it's the government's role to increase spending to return Real GDP to Yf. The multiplier explains how the economy can do so.
AD shocks according to the neo-classical model
- Inflexible wage period: wages are sticky
- Decreased wages
- GDP gap
- AS increase
- AD expands as PL lowers (Due to wealth effect, Interest rate effect, international effect).
- Return to LRAS at lower PL
- No government intervention: the economy will self-adjust: AD shock will decrease wages in the short run and subsequently increase AS.
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