Supply-side economics is one expression of macroeconomics that focuses on the stimulation of economic growth by encouraging greater production of goods and services. Essentially, this removes the issue of demand from the economic task, as the concept of supply-side economics takes the stand that demand will follow if there are goods available for purchase. Often, proponents of this approach will use the extension of incentives to stimulate interest or demand for the goods and services produced.
One of the more common incentives used with a supply-side economics model is to provide tax breaks. Lowering the taxes owed by manufacturers of finished goods is thought to make it practical for producers 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 as they relate to the consumer. With this application of the method, consumers have more disposable income, since the amount of income tax that is deducted from gross pay is reduced. With more money in their pockets, consumers are more likely to feel good about the general state of the economy. This increase confidence leads to additional purchases, which in turn justifies the increased production of manufacturers.
One of the goals of supply-side economics is to minimize the influence of government in the function of economics within the nation. By limiting taxes on producers and consumers alike, governments are less likely to control the process of supply and demand. Unencumbered by heavier tax burdens, the general public buys more goods and services. Manufacturers reap the rewards of increased sales, which helps to justify the high level of production. In theory, supply-side economics has a great deal of appeal.
However, supply-side economics has a number of opponents as well as many supporters. One of the main objections is that the theory does not take into account the idea of demand governing supply, at least not in the traditional sense. The concept is also often compared to Say’s Law, which essentially promotes the idea that demand is created by supply, rather than the other way around.
