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ExamPass · IGCSE worksheet

Supply-side policy

NameClassDate

Key terms

Define each term.

1
Supply-side policy

Multiple choice

Circle the correct answer.

2

Which of the following is a supply-side policy?

  1. A cut in the central bank's interest rate
  2. An increase in unemployment benefit
  3. Government funding for vocational apprenticeships
  4. A rise in government spending on welfare payments
3

An economy is producing at a point inside its production possibility curve. Which statement is correct?

  1. Only supply-side policy can increase output
  2. Demand-side policy can raise output without any increase in capacity
  3. The economy is at full employment
  4. Supply-side policy would have no effect at all

Worked problems

Show your working.

4

Measuring the effect of a training programme. A factory employs 8 workers who together produce 240 units a week. After a government-funded training scheme, the same 8 workers produce 300 units a week. Calculate labour productivity before and after, and the percentage change.

Diagrams

5

Draw a production possibility curve for an economy producing capital goods and consumer goods. Show the effect of a successful supply-side policy. Then, on the same diagram, mark a point inside the curve and show what a successful demand-side policy would do from there.

Answers

1

Supply-side policy: Government measures intended to increase the productive capacity of the economy by improving the quantity or quality of the factors of production, or the efficiency with which they are used.

2

C. Apprenticeships raise the skill of the workforce, so output per worker rises and productive capacity increases. The interest rate cut and the welfare increase both work by raising demand, and a higher unemployment benefit is generally argued to weaken the incentive to take work, so if anything it acts against the supply side.

3

B. A point inside the curve means resources are unemployed, so raising demand can bring them into use and increase output with no change in capacity. Supply-side policy still shifts the curve outwards, but it does not address the immediate problem, which is that existing capacity is going unused.

4

Step 1. Calculate productivity before the training. Labour productivity = total output / number of workers = 240 / 8 = 30 units per worker per week.

Step 2. Calculate productivity after the training. 300 / 8 = 37.5 units per worker per week.

Step 3. Calculate the percentage change. Change = 37.5 - 30 = 7.5. Percentage change = (7.5 / 30) x 100 = 25%.

Step 4. Explain why this is a supply-side effect. The workforce has not grown and no extra spending is required to sustain the gain. The same eight workers now produce more, so the firm's costs per unit fall and the economy's productive capacity has risen. That is a change in what can be produced, not in how much is being demanded.

Always divide by the input. Candidates who compare 240 with 300 and report a 25% rise in output have answered a different question, and the fact that the answer happens to be 25% here will not save them when the workforce also changes.

5

This is the cleanest way to see the difference. Supply-side policy shifts the whole curve outwards, raising what is possible. Demand-side policy moves the economy from a point inside the curve towards it, using capacity that already exists. An economy already on its curve can only grow by shifting it.