Supply-side economics stimulates economic growth by encouraging greater production of goods and services, often using tax breaks as incentives. It aims to minimize government influence and increase consumer confidence, but opponents argue it ignores the traditional idea of demand governing supply.
Supply-side economics is an expression of macroeconomics that focuses on stimulating economic growth by encouraging greater production of goods and services. In essence, this takes the question of demand out of the economic task, since the concept of supply-side economics takes the position that demand will follow if there are goods available for purchase. Often proponents of this approach will use incentive extension to stimulate interest or demand for the goods and services produced.
One of the most common incentives used with a supply-side economic model is to provide tax breaks. Reducing the taxes owed by manufacturers of finished products is thought to make it practical for manufacturers to create more products. In turn, more products mean more choices for consumers, who will respond accordingly.
Along with a reduction in taxes for the producer, supply-side economics also sometimes takes the form of lowering personal income taxes in relation to the consumer. With this application of the method, consumers have more disposable income, as the amount of income tax that is deducted from gross wages is reduced. With more money in their pockets, consumers are more likely to feel good about the overall state of the economy. This increase in confidence leads to more purchases, which in turn justifies producers’ production increases.
One of the goals of supply-side economics is to minimize the influence of the government in the function of the economy within the nation. By limiting taxes on producers and consumers, governments are less likely to control the supply and demand process. Unburdened by heavier tax burdens, the general public buys more goods and services. Producers reap the benefits of increased sales, which helps justify the high level of production. In theory, supply-side economics has a lot of appeal.
However, supply-side economics has a number of opponents and many supporters. One major objection is that the theory ignores the idea of demand governing supply, at least not in the traditional sense. The concept is often compared to Say’s Law, which essentially promotes the idea that demand is created by supply, rather than vice versa.
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