How can the government raise the economy's productive capacity in the long run?
What supply-side policy is, the main supply-side measures (education, training, infrastructure, incentives), and how they raise productivity and long-run growth.
An OCR J205 answer on supply-side policy: how measures such as education, training, infrastructure and incentives raise productivity and the economy's long-run productive capacity.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
OCR wants you to explain what supply-side policy is, identify the main measures, and show how they raise productivity and the economy's long-run productive capacity. Supply-side policy is the third main tool, alongside fiscal and monetary policy.
What supply-side policy is
Unlike fiscal and monetary policy, which mainly change demand, supply-side policy aims to raise how much the economy can produce in the long run. This is shown as an outward shift of the production possibility frontier.
The main supply-side measures
Supply-side policies come in several forms:
- Education and training. Raising workers' skills and productivity, so each worker produces more.
- Infrastructure. Investing in roads, railways, broadband and energy, which lowers firms' costs and supports production.
- Incentives. Lower income tax can encourage work; lower corporation tax can encourage investment.
- Improving competition and flexibility. Reducing unnecessary regulation, promoting competition, and making labour markets more flexible so resources move to where they are most productive.
How they raise productivity and growth
The chain is: better skills, infrastructure and incentives raise productivity, which raises productive capacity, which allows higher long-run growth that is less inflationary.
Strengths and weaknesses
Supply-side policies are valuable but not a quick fix:
- Strengths. They raise long-run capacity, allow non-inflationary growth, and tackle structural unemployment.
- Weaknesses. They are usually slow (education takes years to pay off), costly (with an opportunity cost), and uncertain in their effects. Some measures (cutting benefits, weakening employment protection) can raise inequality.
Because supply-side policy is slow, it is usually combined with demand-side (fiscal and monetary) policy, which acts faster.
Try this
Q1. Define a supply-side policy. [2 marks]
- Cue. A government measure to raise the economy's productive capacity by improving the factors of production.
Q2. Explain one advantage of supply-side policies over boosting demand. [3 marks]
- Cue. They raise productive capacity, so growth can occur without demand outpacing supply, meaning growth without inflation.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/02 20194 marksExplain how spending on education and training is a supply-side policy.Show worked answer →
A 4 mark Explain question.
Supply-side policies aim to raise the economy's productive capacity. Spending on education and training raises workers' skills and productivity, so each worker can produce more.
A more skilled, more productive workforce means firms can produce more output at lower cost, raising the economy's long-run potential. Markers reward linking education and training to higher skills and productivity, and productivity to greater productive capacity.
OCR J205/02 20226 marksDiscuss the advantages and disadvantages of using supply-side policies to raise economic growth.Show worked answer →
A 6 mark evaluative question.
Advantages: supply-side policies raise productivity and productive capacity, so they can deliver growth without causing inflation (unlike boosting demand), and they can cut structural unemployment by improving skills.
Disadvantages: they are often slow to work (education takes years to pay off), can be expensive with an opportunity cost, and the benefits are uncertain. Some measures (such as cutting benefits or weakening unions) can also raise inequality. Markers reward both sides and a judgement, for example that supply-side policies are valuable for long-run growth but slow and costly, so are best combined with demand-side policy.
Related dot points
- What fiscal policy is, how changes in government spending and taxation affect growth, employment and prices, and the costs and benefits of using it.
An OCR J205 answer on fiscal policy: how government spending and taxation are used to pursue economic objectives, their effect on growth, employment and inflation, and the trade-offs involved.
- What monetary policy is, how the central bank uses interest rates to affect saving, borrowing, spending and investment, and the effects on growth and inflation.
An OCR J205 answer on monetary policy: how the Bank of England uses interest rates to affect saving, borrowing, spending and investment, and the effects on growth and inflation, with interest calculations.
- The meaning of economic growth, how it is measured using GDP and GDP per capita, the determinants of growth, and the economic cycle.
An OCR J205 answer on economic growth: its meaning, how it is measured with GDP and GDP per capita, the determinants of growth, and the stages of the economic cycle.
- The meaning and measurement of unemployment, the main types and causes of unemployment, and the consequences of unemployment for individuals, firms and the government.
An OCR J205 answer on unemployment: how it is defined and measured, the main types and causes, and the consequences for individuals, firms and the government.
- The role of producers (individuals, firms and government), the meaning and importance of production and productivity, and the division of labour and specialisation.
An OCR J205 answer on the role of producers, the difference between production and productivity, why productivity matters, and the gains and risks of the division of labour and specialisation.
Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)