Definition of Supply Side Theory

Supply side theory stresses that a country’s economic growth depends mainly upon constantly improving the efficiency of resource allocation. The goal of supply side economic theory is to explain macroeconomic phenomena and offer a policy for economic stability.

Explanation of Supply Side Theory

Supply side theory is based upon three policies i.e. tax policy, regulatory policy and monetary policy. The main purpose is to increase production. Supply side believers think producers and their willingness to create more goods and services drive economic growth and stability. Increased output leads to increased tax receipt by the government, so reserves would grow without tax increases.