AQA A-Level Economics (7136) · The National & International Economy
Specification points
- Market-based and interventionist supply-side policies.
- The effects of supply-side policies on the macroeconomy.
What are supply-side policies?
Supply-side policies aim to raise the economy's productive capacity and productivity, shifting LRAS right. Unlike demand-side policy, they work on the supply side and can improve several objectives at once.
Types of policy
- Market-based — cutting income and corporation tax, deregulation, privatisation, reducing trade-union power, flexible labour markets, cutting benefits to raise work incentives.
- Interventionist — government spending on education, training, infrastructure, and research and development.
Key definitions
| Term | Definition |
|---|---|
| Supply-side policy | Measures to raise productivity and productive capacity (LRAS). |
| Privatisation | Transferring state assets to private ownership to raise efficiency. |
| Productivity | Output per unit of input. |
Effects on the macroeconomy
Successful supply-side policies can raise growth, cut unemployment, lower inflation (more capacity eases price pressure) and improve competitiveness — potentially easing the conflicts between objectives. But they are slow to work, costly (education, infrastructure), and some (deregulation, benefit cuts) can raise inequality.
Supply-side policies raise LRAS, so they can raise growth *without* the inflation a demand boost causes — but only in the long run.
Worked example
A government funds more training and cuts corporation tax. Over several years, workers become more skilled and firms invest, so productivity and LRAS rise. Growth and employment improve with less inflationary pressure than a demand stimulus — but the gains take time and cost money now.
Common exam mistakes
- Confusing supply-side (capacity) with demand-side (fiscal/monetary) policy.
- Assuming effects are instant.
- Ignoring the equity effects of market-based policies.
Exam technique
Explain how each measure raises productivity or capacity (shifting LRAS), then evaluate the time lags, costs and distributional effects.
Quick revision
- Market-based: tax cuts, deregulation, privatisation, flexible labour.
- Interventionist: education, training, infrastructure, R&D.
- Raise LRAS → growth without inflation, but slow and costly.