Publication: Journal of Economic Education
Volume: Volume 25, No. 1
Issue: Winter 1994
Pages: pp. 44-48
Author(s): Ben L. Kyer (Francis Marion University) and Gary E. Maggs (St. John Fisher College)
Address (Principal Author): Ben L. Kyer, School of Business, Francis Marion University, Box 100547, Florence, SC 29501-0547 (803) 661-1419
Internet Address (Principal Author):
Title: A Macroeconomic Approach to Teaching Supply-Side Economics
Abstract: Perhaps the most controversial proposition of supply-side economic theory is that a reduction of marginal income tax rates would increase aggregate supply and real income so significantly that government tax revenue would actually increase. Most pedagogical investigations of this idea consider almost exclusively the microeconomics of the income and substitution effects in the labor and loanable funds markets. A macroeconomic concept that has been ignored in examinations of supply-side theory is the price level elasticity of aggregate demand. This article demonstrates the role of elasticity for supply-side thought with a pedagogical technique appropriate for intermediate-level economics students. A graphical approach shows that in order for tax revenue to increase, the increase of aggregate supply in response to a tax rate reduction must be greater the lower the price level elasticity of aggregate demand.