6.4 Supply side policies Understand what is meant by supply-side policies To explain and evaluate the effects of supply side policies on the economy.

History It used to be thought, certainly in the 1920’s that governments should not get involved in the economy. Free markets were a much better idea and that if there were any issues then the market would sort itself out. 1928 changed that. Wall street crash and great depression and so governments decided that they needed to involve themselves, hence the 3 instruments governments use Fiscal policy/Monetary policy and Supply side economics.

Fig 1 What use to happen here is that we have equilibrium at P/Q. But if the economy was stalling, unemployment was down, then the government would intervene and increase demand, possibly through a fiscal policy. This would shift demand curve right and thus allow for more goods to be demanded. Unfortunately the price moves to P1 which has the impact of increasing prices and could be come almost inflationary.

Fig. 2 So in the 1980’s the Conservative government under Thatcher noticed this and embarked on a supply side policy. Rather then just aim to increase demand, through government breaks, better training etc they aimed to increase supply. It has the same effect to the quantity shifting right but you will note does not allow the price to rise! This is where privatisation became an important tool for the conservative government. A private business is much more cost effective and has far less regulations then a national one.

Privatisation