Supply Side Economics Definition with Behavioral Aspects

Learn what is supply side economics definition covering tax rates and problem related to growth through supply with behavioral choices and effects.

What is Supply Side Economics Definition

This economics theory is popularly known as “Reaganomics” or the “trickle – down” policy. Proponents of this theory hold that for an economy to grow the production of goods and services is very vital. They believe a cut in marginal tax will encourage more investors. This in turn create more job opportunities and the economy will grow.

Additionally, they dismiss the Keynesian economic theory which asserts that demand for services and goods is the key to economic growth. They further argue that the supply side creates its own demand. Even when there is a glut, the price of the commodity lowers.  Consumers will therefore buy more to offset the excess supply. Similarly, if there is a deficit in supply, the price will shoot up. This will encourage suppliers to supply more due to supernormal profit margins.

Supply-side Economics Pillars – Tax rate policies

Proponents of this branch of economics argue that a reduction of marginal income tax will have a positive impact on economic growth. To explain this notion, they argue that a reduced income tax will work as an incentive to induce workers to even work during their leisure time as they will earn more.

A reduction in capital gains tax will also encourage more investors in the economy. This will have a multiplier effect as it will create more job opportunities and thus grow the economy.

On regulatory policy, such economics prefer a free market with little government interventions. This is so because they believe the supply of merchandise can self regulate itself.

The theory asserts that monetary policy is of no economic value as it may create excess inflationary liquidity with an expansionary policy or halt economic growth with a contractionary policy.

Problem with supply side Economics

Proponents advocated for a reduction of taxes which they argue will spur economic growth by trickling down the economic benefits. However, they don’t acknowledge the fact that for the supply side to flourish they require infrastructure such as passable roads. Reduction of taxes will limit government spending on such vital instruments and the effect can be counterproductive.

In conclusion, both Keynesian economics and supply-side economics should be used simultaneously if an economy is to experience any growth.

The Behavioral Economics Choices & Effects

Get a clear meaning of behavioral economics covering how it is driven by human choices and how it affects financial organizations.

Human Choices – What was I thinking?

You are probably thinking that you settle on rational financial decisions at most times, right? Well that may be the case, but many of us do not. If you have ever wondered “what was I thinking when I bought that stock?” or similar, you’ll understand what I am talking about.

We like to think that we make choices neutrally and after enough deliberation. However, psychology and neuroscience studies constantly show that our inherent biases or ‘cognitive biases’ determine our choices. These are developed during our early lives and typically persist. As a result we often tend to respond emotionally or intuitively rather than deliberately and rationally.

This may result in poor judgment in many life aspects and oftentimes it need not have serious consequences. We are all humans and we are prone to making mistakes. Conversely, when it can lead to financial collapse like it did for many during the Global Financial Crisis, it can happen to get the decision right.

How does it affect financial organizations?

A lot of financial institutions have come under the limelight for their strategies in marketing in recent years. They all seek strong economic development. Fingers point at efforts to take advantage of customer decision-making by alluring to their biases, deliberately driving them to less effective choices than competing products or alternatives.

More on the behavioral economics meaning

It is only a matter of time before regulators gring down the hammer again on financial products and/or services, in a bid to protect customers. This is so because of interest from regulators of financial market about these practices Financial products are habitually complex. Some however deliberately present them as confusing or misleading, and the regulators will be targeting this. Financial institutions need to study how they present their product and service range to their customers to make features more transparent.

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