Question

Other factors held constant, a decrease in resource prices will shift the aggregate a. demand curve leftward. b. demand curve rightward. c. supply curve leftward. d. supply curve rightward.

Short answer

A decrease in resource prices will shift the aggregate supply curve rightward, as businesses can produce more goods and services at lower costs. The correct answer choice is (d) supply curve rightward.

Step-by-step solution

Understand aggregate demand and supply curves

The aggregate demand curve shows the relationship between the price level and the quantity of goods and services demanded in an economy. The aggregate supply curve shows the relationship between the price level and the quantity of goods and services supplied in an economy.

Determine how resource prices affect aggregate supply and demand curves

Resource prices are directly related to the cost of producing goods and services. When resource prices decrease, the cost of production for businesses also decreases. As a result, businesses can produce more goods and services at lower costs, which increases their willingness to supply goods and services. This will affect the aggregate supply curve.

Determine the direction of the shift in the aggregate supply curve

Since businesses can now produce more goods and services at lower costs, the aggregate supply curve will shift rightward, because the quantities of goods and services supplied at each price level have increased.

Select the correct answer choice

Option (d) supply curve rightward is the correct answer choice, as a decrease in resource prices will lead to a rightward shift in the aggregate supply curve.

Key concepts

Aggregate Demand

Aggregate demand represents the total quantity of goods and services demanded across an economy at a particular price level. It's composed of the sum of consumption, investment, government spending, and net exports. When prices decrease, the purchasing power of individuals increases, meaning they can buy more with the same amount of money. As a result, lower prices generally increase aggregate demand.
Conversely, higher price levels diminish purchasing power, leading to a decrease in aggregate demand. External factors, such as fiscal policy changes or consumer confidence, can also shift the aggregate demand curve left or right. An increase in government spending, for instance, might shift it to the right, while a decrease in exports might shift it to the left.

Resource Prices

Resources refer to inputs like labor, capital, and raw materials used in the production of goods and services. The cost of these resources, known as resource prices, directly impacts production costs. When resource prices fall, it becomes cheaper for businesses to produce goods and services.
This reduction in costs can increase the profit margins for firms, be encouraging them to produce more. In the context of aggregate supply, a decrease in resource prices can lead to a rightward shift in the supply curve as companies are willing and able to produce more at existing price levels. On the contrary, if resource prices rise, this could lead to a leftward shift, as production becomes more expensive.

Supply Curve Shift

The aggregate supply curve illustrates the relationship between the price level and the total output of goods and services that firms are willing to produce. When discussing shifts in the supply curve, we refer to several influencing factors, like changes in production costs or technology.
A rightward shift in the supply curve indicates that at every price level, the total quantity supplied has increased. This happens when production becomes more lucrative or efficient, such as through technological advancements or reductions in input costs. On the flip side, a leftward shift signifies a decrease in production capacity, possibly due to increased resource prices or other constraints that reduce the willingness or ability to supply goods and services.

Production Costs

Production costs are the expenses incurred by firms to produce goods and services, encompassing factors like wages, materials, and capital equipment. These costs are pivotal as they affect a firm’s ability to supply products.
When production costs decrease, firms can produce the same output more cheaply or increase output for the same cost, leading to increased economic supply. Conversely, if production costs rise, firms may reduce output or raise prices to maintain profit margins, potentially lowering economic supply.

• Lower production costs can stem from advancements in technology or reductions in resource prices, as previously discussed.
• Higher production costs might be the result of increased wages or more expensive raw materials.

Understanding these dynamics helps clarify how shifts in costs impact the overall supply of goods in an economy.