Which of the following factors is likely to decrease aggregate supply?

Which of the following factors is likely to decrease aggregate supply?

• A. Decrease in production costs
• B. Improvement in technology
• C. Increase in resource prices
• D. Increase in consumer demand

Answer: (C)

An increase in resource prices is likely to decrease aggregate supply because it raises the cost of production for businesses. When the prices of raw materials, labor, and other factors of production go up, firms face higher costs, which can lead them to reduce the quantity of goods and services they supply at existing price levels. Businesses may respond to these higher costs by scaling back operations, reducing output, or even shutting down less profitable segments, all of which contribute to a leftward shift in the aggregate supply curve. In contrast, a decrease in production costs would typically increase aggregate supply, as lower costs encourage firms to produce more. Improvement in technology tends to enhance productivity and efficiency, which also leads to an increase in aggregate supply. An increase in consumer demand primarily affects aggregate demand rather than aggregate supply, as it reflects higher overall spending and needs in the economy, encouraging businesses to increase output to meet this demand.

An increase in resource prices is likely to decrease aggregate supply because it raises the cost of production for businesses. When the prices of raw materials, labor, and other factors of production go up, firms face higher costs, which can lead them to reduce the quantity of goods and services they supply at existing price levels. Businesses may respond to these higher costs by scaling back operations, reducing output, or even shutting down less profitable segments, all of which contribute to a leftward shift in the aggregate supply curve.

In contrast, a decrease in production costs would typically increase aggregate supply, as lower costs encourage firms to produce more. Improvement in technology tends to enhance productivity and efficiency, which also leads to an increase in aggregate supply. An increase in consumer demand primarily affects aggregate demand rather than aggregate supply, as it reflects higher overall spending and needs in the economy, encouraging businesses to increase output to meet this demand.