Definition of supply-side policy

Published by Patrick Mutisya · 14 days ago

Supply‑side Policy – Definition

Government and the Macro‑economy

Supply‑side Policy

Definition: Supply‑side policy refers to measures taken by the government to increase the productive capacity of the economy and shift the long‑run aggregate supply (LRAS) curve to the right.

The aim is to improve the efficiency and flexibility of markets, encouraging higher output, lower unemployment and, in the long run, sustainable economic growth.

Key Objectives of Supply‑side Policy

  • Increase the quantity and quality of factors of production.

  • Improve the efficiency of resource allocation.

  • Enhance productivity and competitiveness.

  • Reduce structural unemployment.

  • Control inflationary pressures without relying on demand‑side measures.

Typical Supply‑side Measures

  1. Education and training programmes to raise human capital.

  2. Research and development incentives.

  3. Tax reforms (e.g., lower marginal tax rates, tax credits for investment).

  4. Deregulation and removal of barriers to entry.

  5. Privatisation of state‑owned enterprises.

  6. Infrastructure investment (transport, energy, communications).

  7. Labour market reforms (flexible wages, reduced trade union power).

How Supply‑side Policy Affects the Economy

Policy ActionImmediate EffectLong‑run Effect on LRAS
Improved educationHigher skill levels, modest wage riseRightward shift of LRAS (more productive workers)
Tax cuts for firmsIncreased after‑tax profit, higher investmentRightward shift of LRAS (greater capital stock)
DeregulationLower compliance costs, entry of new firmsRightward shift of LRAS (more efficient markets)
Infrastructure spendingBetter transport and communicationRightward shift of LRAS (reduced production costs)

Suggested diagram: LRAS curve shifting rightward due to supply‑side policies.