Question

Select the correct answer from each drop-down menu.

Answer 1

Answer:

1. Technical improvements cause production costs to decline, which causes supply to increase and prices to decrease.

2. Decreased unemployment causes consumer incomes to increase which causes demand to increase and hence price to increase.

Explanation:

Demand refers to a consumer's desire to purchase a particular good or service at a given time for a specific price. Supply on the other hand, is the willingness of a producer to produce a particular good or service at a given time for specific price.

1. Production cost is a factor that influences supply. For example, cost of labor or raw material cost. When production costs fall, more products can be produced at a lesser cost. Hence'

1. The supply curve shifts right from S1 to S2.
2. This causes quantity supplied to increase from QS1 to QS2
3. And price to fall from P2 to P1. Please refer Diagram 1 in attachment.

2. When unemployment decreases, it means that more people are working in the economy and hence their incomes are also higher. This means there is a higher purchasing power and also higher demand for products. Hence,

1. The demand curve shifts from D1 to D2.
2. This causes quantity demanded to increase from QD1 to QD2
3. And price to increase from P1 to P2.  Please refer Diagram 2 in attachment.