Supply-Side Economics vs. Demand-Side Economics

Two competing macroeconomic theories dominate modern economic policies and the field of political economy. These are supply-side economics and demand-side economics.

Supply-side economics is a macroeconomic theory arguing that economic growth is made possible through programs or initiatives aimed at promoting production and thus, flooding the market with supplies of products goods and services.

On the other hand, demand-side economics argues that economic growth is best achieved by promoting consumer spending or increasing the purchasing power of the consumers and thereby, creating a high demand for goods and services.

The Specific Difference Between Supply-Side Economics and Demand-Side Economics

Economics is complex. However, it all comes down to a relatively simple concept: supply and demand. Supply pertains to both the activities of businesses and the availability of their products in the market while demand is essentially about how badly people want these products.

Supporters of supply-side economics argue that the government should develop and implement policies aimed at lowering barriers on production. Examples of these policies include tax incentives or tax cuts and decrease regulation or actual deregulation.

Those who support demand-side economics contend that the government should focus on policies and strategies aimed at increasing consumer spending. These include government spending, price regulation, and employment programs, among others.

In other words, from the supply-side perspective, the economy is driven primarily by supply. On the other hand, from the demand-side perspective, consumer demand predominantly drives the economy.

More Specific Examples of Supply-Side Policies and Demand-Side Policies

To understand better the difference between the two macroeconomic theories, it is also important to know the different policies or initiatives, strategies, and programs that fall under each.

Below are specific examples of supply-side policies:

• Tax Breaks and Tax Cuts: The government can encourage investment or support business expansion by lowering businesses taxes or giving tax breaks to companies operating in specific industries and sectors.

• Decreasing Regulation: Regulation can discourage business creation. Through deregulation or simply decreasing regulation, the government can lower the barrier to entry and thus, opening markets for competition.

• Free-Market Competition: Increasing and promoting efficient competition can drive production. The government can do this by removing monopolies or duopolies, privatizing certain industries or sectors, and reducing trade barriers.

• Controlling Labor Costs: An unpopular policy is to control labor costs to attract businesses. Such could be down by not raising the minimum wage, reducing employment and unemployment benefits, limiting labor rights.

• Monetary and Fiscal Policies: The government, through its central bank, can encourage business loans by a monetary policy aimed at lowering interest rates. Furthermore, tax policy is also part of fiscal policy.

The following are specific examples of demand-side policies:

• Monetary Policy: A monetary policy is a particular function of a central bank aimed at influencing the interest rates of banks. An expansionary monetary increases aggregate demand by making credit more accessible to the people due to lower interest rates.

• Fiscal Policy: Meanwhile, fiscal policy generally revolves around tax policy and government spending programs. Take note that the government can increase the aggregate demand by increasing its spending.

• Expanding Labor Rights: The government can influence private consumption by developing laws that promote the rights of labors. These laws could include increasing the minimum wage and expanding mandatory benefits.

• Regulation: Regulating economic activities to a certain degree can also improve the purchasing power of the people. A prime example is price regulation in which the government sets price levels for certain commodities.

• Increasing the Money Supply: Also a specific example of monetary policy, increasing money in circulation would mean giving people purchasing leverage, thus increasing the demand for goods and services.

A Note on the Differences Between the Two Macroeconomic Theories

There are contentions against the two theories. Critics of supply-side economics have often argued that policies created therein often result in fiscal deficits due to tax cuts, increase income inequality, and fail to produce long-term economic growth.

On the other hand, critics of demand-side economics point have raised concerns about deficits due to government spending, credit defaults due to increased borrowing, and discouraged business environment due to a higher degree of interventionism.

FURTHER READINGS AND REFERENCES

  • Berdell, J. 2010. “Retrospectives: An Early Supply-Side-Demand-Side Controversy: Petty, Law, Cantillon.” Journal of Economic Perspectives. 24(4): 207-217. DOI: 1257/jep.24.4.207
  • Brin, D. 2010. “A Primer on Supply-Side vs. Demand-Side Economics.” Institute for Ethics and Emerging Technologies. Available online
Posted in Articles, Business and Economics and tagged , .