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Effectiveness of Supply-Side Policies in Increasing Enterprise

Discuss the effectiveness of supply-side policies in increasing the supply of enterprise to the economy.

Category:

Macroeconomic Factors and Policies

[CIE AS level May June 2018]

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Answer

Tip : The keyword here is enterprise. Start with a definition or explanation of the factor enterprise. Do not write very general answers that focus upon all the policies that might be aimed at shifting the aggregate supply curve to the right, particularly if it has little relevance to the factor enterprise.


Step ➊ : Define ‘supply-side policies’ and ‘enterprise’ in the introduction.


Entrepreneurship is essential for economic progress and economic growth. Entrepreneurship carries out two main functions. First, the enterprise factor organises the other three factors of production. Second, enterprise involves taking the risk of production, which exists in a free enterprise economy. Consequently, the government may implement supply side policies to promote enterprise. These are policies aimed at increasing Aggregate Supply (AS). They enhance the productive capacities of an economy while improving the quality and quantity of the four factors of production.


Step ➋: Discuss the policies available to increase the supply of enterprise to the economy.


➤ 2.1 Supply-side policies such as grants, reduction in tax rates and tax breaks for investment can be used to increase the supply of enterprise in an economy.

The government can encourage entrepreneurs to start new businesses by lowering the marginal tax rate and encouraging share ownership amongst employees. The government may also help entrepreneurs by not requiring new businesses to pay corporate taxes during their first three years. A cut in corporation tax will increase after-tax profits. This will leave more funds for the business to plough back into investment e.g on new production processes.

➤ 2.2 The government can improve the economic environment

This can be done via business start-up programs, venture capital financing and investment in R&D or technology transfer. The government can reduce the regulatory burden on entrepreneurs. These include granting permits more quickly – or even automatically – and making greater use of digital technology. Providing government services online reduces the regulatory burden on entrepreneurs.

➤ 2.3 The government should provide coaching and education schemes to businesses and potential entrepreneurs.

The government can help entrepreneurs through the subsidy of business coaching. Coaching can be a diverse form of advice-giving, including specific information on such issues as marketing but also more generalized advice to new business owners whose background and experience in their new roles may be limited. Enterprise education involves teaching students the knowledge they will need to be future employees and potential employers by providing opportunities to raise their awareness of problems and solutions in the context of business and enterprise.


Step ➌ : Discuss the effectiveness of the policies available to increase the supply of enterprise to the economy.


The supply-side policies to increase entrepreneurship are not always effective.

➤ 3.1 Tax cuts or investment allowances will not be effective if business confidence is low. A reduction in tax may not encourage entrepreneurs during an economic recession, This is because a return is not guaranteed for their investment.

➤ 3.2 Most supply-side policies can take a long time to work and for the effects to be seen in the economy. For example, if the country wants to improve the quality of human capital, through education and training, this will normally take years to complete and for the economy to reap tangible benefits.

➤ 3.3 Supply Side policies can be costly to implement. For example, for the government to improve the quality of human capital, it will need to sponsor or subsidize education and training programs. These programs are highly labour intensive and extremely costly.


Step ➍ : Conclude.


To conclude, using supply-side policies to increase the supply of enterprise is effective only to an extent. A range of supply-side policies such as training or grants can be used to ensure the best outcome for entrepreneurs. However, the economic situation, the time delay and the cost must be taken into account before deciding to implement these policies.


♕ Examiner’s report


A definition or explanation of the factor enterprise would have helped the candidates focus upon the question requirements here. Unfortunately, most candidates began their answers with an explanation of supply-side policy and this then often resulted in very general answers that focused upon all the policies that might be aimed at shifting the aggregate supply curve to the right even if there was little relevance to the factor enterprise. There were a large number of answers that contained sound, detailed analysis of supply-side policies that scored poorly because they did not apply to the factor enterprise except in very general terms. Some weaker candidates clearly did not understand supply side policy and discussed monetary or fiscal policy but not with a supply side focus. Many responses to this question were very disappointing and the marks awarded were usually low.


♕ Mark scheme


Up to 8 marks for analysis of supply side policies and their impact on the supply of enterprise:

• For an explanation of how any supply side policies can increase the supply of enterprise to the economy (Up to 4 marks)

• For an explanation of the difficulties associated with the application of these policies. (Up to 4 marks)
Up to 4 marks for evaluative comment with 1 mark reserved for a reasoned conclusion on the overall effectiveness of the policies.

To answer this effectively, candidates must have a good knowledge of the role of enterprise and the ways in which supply side policies operate to encourage enterprise. These include reducing business taxes, improving the economic environment and providing training for prospective entrepreneurs. Accept a broad idea of ‘enterprise’. This could refer to the number of entrepreneurs in the market or the expansion of existing firms that necessitates an increase in risk and organisation. If the policies introduced do not refer to the supply of enterprise but are very general descriptions of supply side policies then no credit should be awarded.

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