Supply Side policies are basically initiated to increase the capacity of the economy move the LRAS/PPF outwards. 

So:

Land, Labour, Capital & Enterprise

 

See Economic Growth page for diagrams.

 

Supply Side Policies can be divided into labour market measures or product market measures: 

 

LABOUR MARKET MEASURES:

 

• Low Rates of income tax: This will provide people with an incentive to work and be more productive. 

 

You could bring in the Laffer Curve as it illustrates how increasing the rate of tax will also increase

tax revenue, because despite people the rate of tax being high, people will just stop working and will

 be demotivated in the case of income taxes. Hence, why tax should be kept at a reasonable rate.

 

• Reducing state welfare benefits, and ‘welfare to work’: This will encourage people to find work as the income from benefits is too low.  This way people may even have no choice but to take Minimum waged jobs.

        ‘Welfare to work’ schemes will also provide people with an incentive to work, along with National Minimum Wage.

• Education and training: This will increase the quality and quantity of those who have suitable skills to work.  Will increase the supply capacity of the nation.  Although this takes time, in the long run the benefits are huge.

 

• Trade Union reforms: Will increase workers confidence regarding work and wil provide them with some stability.

 

PRODUCT MEASURE MARKETS:

• Contestability: As said in AS, low trade barriers increases competition which further increases efficiency which would lead to the LRAS shifting to the right.  Firms also become more dynamically efficient so that they can innovate and have an advantage over other firms.  Increased investment.

• Measures to also increase entrepreneurship: EG: by subsidising start-ups, reducing rates of corporation’s tax for small businesses, allowing tax relief on capital spending and regional policy assistance in depressed areas.

 

Supply-Side growth offers the possibility of steady, sustainable growth without inflationary pressures.  It also offers the chance for job creation and an improvement in the current account of balance of payments.

 

When AD is rising, if the productive capacity of the economy is increasing it does not have to result in inflation.  Whilst we may import more, the low inflation could mean making our goods more internationally competitive as countries may want to buy the cheap goods.