DEFINITION : Supply side policies are long term measures intended to increase the productive capacity of the economy. This can be done through rapid technological advances, accumulation of capital stock, and continuous rise in labour productivity, which will shift the AS curve to the right.

The history of the long term supply side polices can be traced back to

the Singapore economic crisis years (majorly 2008~2009) where

Singapore undergoes harsh recession.

AD-AS graph illustrating the state of Singapore at 2009

In 2009 singapore encountered a recession and led to lots of firms to cut

the amount of workers they employ. This led to the national equilibrium

to be at the Keynesian range of the Supply curve as shown in the above

graph . During the recession AD decreased. so the aim was to move it

back to where it was. See graph below:

However when the recession was over and they had “recovered” in 2010

through inflationary growth, Singapore decided to focus more on AS

policies (such as increasing productivity and lowering firms costs) in

order for the country to be more resilient in the future and to make long

term goals to sustain the economic growth not at the cost of inflation

The graph above illustrates the aim of the government. Through shifting

AS curve outwards, we notice that the GPL will drop as the national

income still increases. We also noticed that long term supply policies

will not work during recession as the equilibrium is at the Keynesian

range and no matter how we shift the AS curve outwards, there wouldn’t

be any effect. Hence Supply side polices are an extension from the

demand side polices to promote economic growth.

A good illustration in general would be a graph like this

Measures:

1. Increase general education level and skills of workers.If the

government invests more in education, then the workforce will be

more skilled. This will raise personal output and therefore

aggregate supply.

2. government supports help to those with lower incomes and

universal increases in training and education that will hopefully

help to increase output and therefore the welfare of all people.

3. government would need to find a way to compensate workers (tax

cuts, etc.) to make workers feel more willing to work harder and

achieve higher output.

Other than measures targeted at increasing labour productivity (i.e.

through promoting quality education; and constant training &

upgrading of the workforce), supply side policies would also include

those targeted at increasing investment (including inflow of foreign

direct investment), encouraging entrepreneurship; and encouraging

technological advancement (i.e. R&D). Govt spending on infrastructure

for the economy (e.g. highways, transport and communication

networks) is also part of supply side policies.

However in general In the short run, supply side policies are almost

ineffective because firms are simply producing more. It will take time

for aggregate demand to increase though, so it is not until the LR that

these supply side policies will be affective.

MCQs

1. Why is the long-term supply side policy favoured now instead of

during the recession?

(A) Singapore did not have enough resources back then

(B) Singapore had not reach near full-employment at that time

(C) Singapore can’t afford to pump money into this back then.

(D) The policy’s disastrous and will cause more harm than good

2. Since the economy is already starting to recover in 2010, why is

this policy necessary?

(A) Singapore wish to achieve a faster and more rapid growth

(B) Singapore did so to tackle the problem of high inflation

(C) The government is trying to increase their earnings

(D) Singapore made a wrong decision

3. Which of the following could be part of the government’s

measures in the policy ?

(A) Encourage savings of people(more saving, more supply)

(B) Increase the GPL ( price high, nobody buy. More supply)

(C) Reduce the population(Less demand, more supply)

(D) Increase Wages of workers ( More output, more supply)

ANS : 1. B 2. B 3. D