What’s the Point of Supply-Side Policies Anyway?

What’s the Point of Supply-Side Policies Anyway?
Or: Why Governments Try to Give Their Economies a Red Bull (Without the Sugar Crash)

Imagine your country’s economy is a tired old laptop. It still works, but it’s sluggish, crashes when you open too many tabs, and screams every time you try to stream Netflix and write an essay at the same time. Supply-side policies are basically the RAM upgrade of the laptop - the long-term investment to make everything faster, more productive, and able to handle more without blowing up.

In IB Economic terms? They’re policies designed to increase the productive capacity of the economy - aka shifting the LRAS or PPC curves outwards. But let’s not get ahead of ourselves.

What Are Supply-Side Policies, Really?

They’re government strategies to improve the quantity and / or quality of factors of production - think better workers, better machines, more efficient systems, and higher productivity.

You don’t see immediate results like you might with fiscal or monetary policies (those are your caffeine shots). Supply-side policies are about long-term gains. It’s economic gym training sessions. No one gets shredded in a day.

What Are the Goals?

Let’s break down what supply-side policies actually try to achieve, with a little help from some real-world context:

1. Boost Long-Term Growth

Supply-side policies shift the economy’s LRAS to the right. That means the economy can produce more stuff without causing inflation.

Think of it like this: Apple isn’t just trying to sell you the latest iPhone 18 Super Max Ultra Titanium - they’re also investing in faster production lines in India and Vietnam to make more units at lower cost. That’s supply-side in action.

And when the economy produces more? The average price level can even drop. Inflation who?

As an economist would imagine it: Supply-side policies are used to increase the productive capacity of the economy from YF1 to YF2 by shifting the LRAS curve to the right from LRAS1 to LRAS2 A major advantage of this is that the average price level falls, from PL1 to PL2 as efficiency and productivity are greater.

With a PPC I would see it like this: Supply-side policies are used to shift the economy’s production possibility curve from PPC1 to PPC2. This increases the economy’s capacity to produce more goods and services, from point A on PPC1 to point B on PPC2.

2. Make Markets More Competitive and Efficient

Governments often open up markets to competition. This could mean breaking up monopolies (looking at you, Meta), reducing red tape, or slashing tariffs.

Example: The EU’s push for trade liberalisation with African countries lets goods move more freely, encouraging efficiency and innovation.

Why care? Because competition = better products, lower prices, and smarter businesses. Everyone wins - except lazy monopolies.

3. Cut Labour Costs and Tackle Unemployment

Supply-side policies often focus on making labour markets more flexible. That’s a fancy way of saying “make it easier for firms to hire and fire people”.

Controversial? Yes. Effective? Sometimes.

In the UK, reducing the power of unions or tweaking minimum wage laws can help businesses save costs and hire more - but it's a trade-off. You're balancing flexibility with fairness.

As an economist would see it regarding the impact of a minimum wage on the labour market:

The market equilibrium wage rate is WE with NE millions of people with jobs. The minimum wage at WM increases labour costs, so the aggregate demand for labour (ADL) becomes smaller from NE to NE. The higher wage rate attracts more people to the labour market, expanding the aggregate supply of labour (ASL) from NE to NS. As ASL > ADL at WM, the disequilibrium creates unemployment. Reducing or removing minimum wages can increase incentives to work and restore labour market

4. Reduce Inflation and Improve Competitiveness

If your costs go down (because of cheaper labour, lower taxes, more efficient systems), prices fall - and suddenly your exports are cheaper abroad.

Germany’s industrial strategy is a good example. Their tight control on inflation helps Mercedes stay competitive even as luxury brands flood the market.

5. Encourage Innovation and Investment

Lower corporation tax = higher chance a business will risk those extra profits on that weird AI project or climate tech start-up idea.

Singapore, for instance, offers juicy tax breaks and subsidies for R&D, attracting firms like Dyson and biotech companies.

Supply-side win? Check.

Two Types of Supply-Side Policies

Let’s split the policies into two camps:

Market-Based Policies - Let the Market Do Its Thing

Governments take a step back and say, “You’ve got this, market forces.”

Examples:

• Deregulation – removing barriers for new firms (like ride-hailing apps crushing traditional taxis)

• Privatisation – selling off public assets (like British Rail... back when that seemed like a good idea)

• Trade Liberalisation – cutting tariffs to boost global trade

• Anti-Monopoly Laws – making sure Jeff Bezos doesn’t buy the Moon

Market-based policies rely on incentives - reward productivity and innovation, punish laziness and inefficiency.

Interventionist Policies - Government Gets Involved

Now the government’s more hands-on. It’s the “we’ll invest in your future” approach.

Examples:

• Education and training – teaching people skills that actually matter (no offence to Latin or Greek meant)

• Public healthcare – because healthy workers don’t call in sick

• Infrastructure – high-speed rail, clean energy grids, broadband in rural areas

• Industrial policies – like South Korea’s support for tech giants in the 80s (hello, Samsung)

All of this boosts the productive capacity of the economy - better workers, better tools, better output.

Real-World Examples Worth Dropping in Your IA

• China’s Belt and Road Initiative: Infrastructure on steroids

• India’s privatisation of Air India: Moving from state-run to private sector efficiency

• Finland’s investment in education: Long-term supply-side gold

• Kenya’s M-Pesa mobile money system: Tech-driven supply-side boost through innovation

Stay well