Market-based supply policies: an aggregate demand and long-run aggregate supply chart with a four-stage transmission chain from policy to productive capacity

Market-based supply policy builds nothing itself: it changes the incentives

Interventionist supply policy buys things: roads, training places, research grants. Market-based supply policy buys nothing and changes the rules instead, so firms and workers choose to invest, cut costs and compete harder. Raise the policy intensity and watch each stage of the chain light up before LRAS₁ moves; then switch the mechanism at the same intensity and see which stages change.

Policy to productive capacity
Tax reform · low
Raise the intensity. Switch the mechanism. Watch the chain, then LRAS₁.
Mechanism
Capacity 100 → 102 · LRAS right +2%
Policy intensity15 / 100
NoneModerateStrong
Productive capacity (index)
102
Investment (index)
103

Indices are illustrative: they show the direction and order of effects, not measured sizes.

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Market-based supply policies change incentives rather than buying capacity: the chain runs through investment or unit costs to productivity and only then to LRAS.