OCR A Level Economics: Supply-side policy (H460) – Revision Notes

These notes condense the topic Supply side policy from the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021 (Macroeconomics, Component 02). The specification labels none of it as AS or Extension. For full explanations, read the study guide. Test yourself with the practice questions. Plan with the OCR Economics hub, the checklist and the free diagnostics. All data are invented and illustrative.

Key definitions

Term	Meaning
Supply-side policy	Measures that raise the quality or quantity of factors of production, or make markets work better, so potential output grows
Marginal tax rate	Share of each extra unit of income taken in tax
Effective marginal rate	Tax plus benefits lost on each extra unit earned
National Minimum Wage	Legal wage floor
Living wage	Wage linked to the cost of living, promoted by government or others, which employers may choose to pay
Human capital	Skills and knowledge of the workforce
Geographical and occupational mobility	Ease of moving place or job
Privatisation	Transfer of ownership from public to private sector
Deregulation	Removing rules that restrict entry or add costs
Crowding in	Public investment that encourages more private investment

The twelve measures at a glance

Measure	Factor changed	Main benefit	Main drawback
Education and training	Quality of labour	Higher productivity, mobility	Slow, costly, may not match needs
Tax and benefit reform	Quantity of labour	Work pays more	Revenue cost, inequality
Lower marginal tax rates	Labour supply, enterprise	Reward for effort	Income effect, revenue loss
NMW, living wage	Incentive to work	Raises pay of the low-paid	Possible job losses, costs
Labour market flexibility, housing	Mobility	Fewer vacancies and unemployed	Insecurity, slow house building
Immigration	Quantity and quality of labour	Fills shortages	Pressure on services, per-head effects
Privatisation	Efficiency of capital	Lower costs, innovation	Private monopoly, social losses
Deregulation	Entry, costs	More competition	Weaker protection
Trade union reform	Labour cost and flexibility	Fewer strikes	Lower voice and morale
Infrastructure, transport	Quantity and quality of capital	Lower business costs	Large cost, long delay
R&D incentives	Technology	Innovation, spillovers	Cost, uncertain results
Subsidies	Cost of production	More output, lower price	Cost to taxpayers, inefficiency

The diagram

Describe it in words. LRAS1 shifts right to LRAS2. The price level falls from P1 to P2 and real output rises from Y1 to Y2. Say that potential output and the trend rate of growth rise. Policies that mainly raise demand shift AD, not LRAS.

Formulas and methods

Item	Method
Tax on income	Apply each rate to the slice of income in that band
Effective marginal rate	1 − (take-home from extra pay ÷ extra pay)
Employment change	Wage elasticity of demand for labour × % change in wage
Net present value	Present value of benefits − cost
GDP per head	GDP ÷ population
Subsidy cost	Subsidy per unit × new quantity

Method in steps: effective marginal rate

1. Take the extra pay, for example 100.
2. Subtract tax at the marginal rate.
3. Subtract benefit lost on the net amount.
4. Compare what is kept with the 100.

Example: tax 30%, benefit loss 45% of net. Net = 70. Benefit lost = 31.5. Kept = 38.5. Effective rate = 61.5%.

Small worked reminders

• A worker with a 30% marginal rate gets a 4,000 pay rise and keeps 2,800.
• NMW up 8%, elasticity −0.5: employment falls 4%.
• Training costs 1,500 and adds 400 a year for 5 years at 5%: present value = 400 × 4.3295 = 1,732; net present value = +232.
• Trend growth of 3% against 2% for 5 years: index 115.9 against 110.4, about 5% higher.
• Subsidy 6 per unit and output 50: cost 300.
• A state firm cuts unit cost from 40 to 36: down 10%.
• A worker gains 2,000 from moving but pays 2,600 more rent: net −600, so does not move. If the rent gap falls to 1,200, net = +800.

Must-know distinctions

• Supply-side policy shifts LRAS; demand-side policy shifts AD.
• Quality of factors (skills, technology) against quantity (more workers, more capital).
• NMW (compulsory) against a living wage (voluntary or promoted).
• GDP (total) against GDP per head (average).
• Private return against social return, since spillovers justify R&D support.
• Market-based policies (deregulation, tax cuts) against interventionist ones (subsidies, training funded by the state).

Subsidies and R&D: the logic

A subsidy shifts the supply curve down or right by the amount per unit. Equilibrium quantity rises, the price consumers pay falls, and producers receive more than before, because they get the price plus the subsidy. Who gains more depends on the slopes of demand and supply: the steeper curve side gets the bigger share. Cost to government = subsidy per unit × new quantity.

R&D incentives work when the private return is below the cost but the social return, including spillovers, is above it. Example: cost 8m, private return 6.5m, tax credit 25% cuts the cost to 6m, so the firm goes ahead. If the social return is 11m the credit costing 2m is worth it.

Effectiveness against each objective

Objective	How supply-side policy helps	Limit
Economic growth	Raises potential output and the trend rate	Long lags
Low inflation	Lower costs, more capacity	Weak if costs rise elsewhere
Low unemployment	Better skills and mobility reduce structural unemployment	Does not cure demand-deficient unemployment
Balance of payments	Better competitiveness, more exports	Depends on rivals and exchange rates
Income distribution	Higher employment and pay at the bottom	Tax cuts and weaker unions may widen gaps
Government finances	Higher output means more tax revenue	Upfront cost of spending and subsidies

Chains of reasoning to learn

1. Lower marginal tax → more reward for extra work → more hours and effort, more people enter work → more labour supply → higher potential output. Limit: the income effect, and lost revenue.
2. Training → higher skills → higher productivity → lower unit labour costs → better competitiveness and room for growth without inflation. Limit: delay and poor match.
3. Privatisation → profit motive → lower costs → lower prices, more investment. Limit: private monopoly power.
4. Infrastructure → lower transport costs → firms more profitable → more investment (crowding in). Limit: long lags and big fiscal cost.
5. Immigration → more workers → LRAS right → growth. Limit: per-head output may not rise.

Short-run and long-run view

In the short run, some measures raise costs or cut demand: a sharp rise in the minimum wage may raise prices, and job losses follow privatisation when firms cut staff. In the long run the gains come through higher productivity and capacity. Say which time period your point refers to, and use it to justify a final judgement.

Evaluation prompts

• Time lag: how long before the policy works?
• Size of cost against size of benefit.
• Elasticity: how responsive are workers and firms?
• Spare capacity: is demand strong enough to use the new capacity?
• Who gains and who loses, and what happens to inequality?
• Which objective matters most in the context given?

Quick self-test

1. Say what is meant by supply-side policy.
2. A worker with a 30% marginal tax rate gets a 4,000 pay rise. How much is kept?
3. Wage elasticity of demand for labour is −0.5 and the NMW rises 8%. Find the change in employment.
4. Tax is 30% and 45% of net earnings is lost in benefits. Find the effective marginal rate on an extra 100.
5. Training costs 1,500 and adds 400 a year for 5 years (annuity factor 4.3295 at 5%). Find the net present value.
6. State two ways immigration may raise potential output.
7. A subsidy of 6 per unit raises output to 50. Find the cost.
8. Distinguish a National Minimum Wage from a living wage.
9. Why might privatisation not improve efficiency?
10. State one reason the housing market matters for labour flexibility.

Answers

1. Policy that raises the quality or quantity of factors of production, shifting LRAS right.
2. 4,000 × 0.70 = 2,800.
3. −0.5 × 8% = −4%.
4. Net 70; benefit lost 31.5; kept 38.5; rate 61.5%.
5. 400 × 4.3295 = 1,732 (rounded); minus 1,500 = +232.
6. More workers (quantity); skills of migrants raise quality; fills shortages.
7. 6 × 50 = 300.
8. NMW is a legal floor; a living wage relates to cost of living and is promoted, not compelled.
9. A private monopoly with no competition may raise prices and has no pressure to cut costs.
10. High rents and housing shortages stop workers moving to jobs, leaving vacancies and regional unemployment.

Where marks are usually lost

• Treating supply-side policy as demand-side, with the wrong curve shifted.
• Listing measures without a chain of reasoning to an objective.
• Saying a policy “will” work, with no judgement of size, time or cost.
• Giving the NMW effect without mentioning elasticity.
• Mixing up average and marginal tax rates.
• Forgetting that GDP per head can fall when GDP rises.
• Ignoring spare capacity and weak demand.
• A conclusion that repeats points without choosing between them.

Official syllabus

OCR, A Level in Economics (H460), specification Version 3.0 (June 2026), for first assessment in 2021: Macroeconomics, The application of policy instruments, topic Supply side policy.