Classical Economics vs Supply-Side Economics
Classical Economics and Supply-Side Economics are two Economic Systems & Schools of Thought concepts in AP Economics that students often mix up. In short: classical economics is classical economics holds that free markets self-correct to full employment in the long run, so government intervention is largely unnecessary. Meanwhile, supply-side economics is supply-side economics argues that lower taxes and less regulation boost growth by increasing the incentive to work, save, and invest. Here is how they compare side by side.
Classical economics holds that free markets self-correct to full employment in the long run, so government intervention is largely unnecessary.
Associated with Adam Smith and Say's Law ('supply creates its own demand'), it emphasizes flexible wages and prices restoring equilibrium. It corresponds to the vertical long-run aggregate supply curve and contrasts with Keynesian economics.
Supply-side economics argues that lower taxes and less regulation boost growth by increasing the incentive to work, save, and invest.
It focuses on shifting long-run aggregate supply right rather than managing demand. The Laffer curve suggests tax cuts can sometimes raise revenue by expanding activity. Critics question the size of those effects and warn of larger deficits.
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