Supply-side economics

Updated: Aug 20, 2021

An approach to macroeconomics which became popular in the late 1970s and which emphasizes the importance of aggregate supply in determining the levels of prices, income, employment, and economic growth. Supply-side price shocks refer to events and/or circumstances which cause the price leve! to rise in the absence of increases in aggregate demand. A series of supply-side shocks such as oil price rises made by O.P.E.C., food shortages, reduced productivity and lower investment are biamed for much of the stagflation of the 1970s. The emphasis on supply-side economics has led to a set of policy proposals quite different from the keynesian prescriptions. Saving is to be encouraged to permit investment to take place at a higher rate; taxes should be lowered to encourage work effort and risk­taking; social security payments should be adjusted to encourage labour mobility.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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