What is Supply-Side Policy?

After exploring demand-side policies, we will move on to supply-side policies. In this article, we will look at who carries it out and why, and in future articles, we will see the different forms of supply-side policy.

Supply-side policy is managed by the government, and its main focus is increasing long-run aggregate supply or LRAS. This is to meet the macroeconomic objective of increased economic growth, and can also reduce inflation – however, this is only a side effect and not one of the direct aims of supply-side policy.

As seen in the diagram above, increasing LRAS causes this targeted growth as real national income increases from RNY1 to RNY2. This also has the added side effect of deflation, as the general price level moves from GPL1 to GPL2. (Ignore the different labels, it’s essentially the same as PL and RNO)

The difference between supply-side policies and simple government spending, which is a demand-side fiscal policy, is that in government spending the government simply increases funding to different public sectors or to important industries, who then get to decide what to do with this money. However, supply-side policy requires the government to take a more active role in this, as instead of giving it to other people, the money will be invested by the government into infrastructure projects, healthcare services, schools, etc. It also involves (de)regulation, as this controls the manufacturing processes firms can use and therefore the maximum possible output they can produce, which affects LRAS. We will have a look at these examples in coming articles, including how they can be carried out, the impacts and the drawbacks.


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