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home / study / business / economics / economics questions and answers / Assume A Technological Advance Leads To Lower Production Costs. Show The Effect This Will Have ... Question: Assume a technological advance leads to lower production costs. Show the effect this will have on... Assume a technological advance leads to lower production costs. Show the effect this will have on national income, unemployment, inflation, and interest rates with the help of an ADAS diagram, assuming completely flexible wage rates.

Answer 1

When there is technological advancements and that leads to lower production cost, which reduces the producing cost of a firm. When production cost of a firm declines, firms try to expand their supply level. When they increase their supply level, short run supply curve shifts to its right while demand curve at its initial position, creating a new equilibrium from E to E1 which reduces price level and increase the real GDP of economy. When prices reduces, inflation level falls. When inflation is low people will demand more of a product and firms will try to expand sales for which they will expand and manufacture new plants. Interest rates are likely to increase as overall demand for products have increased in the market. In the long run if production cost remains at the lower level, long run supply curve also shifts to its right.

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Philips Curve says that Real GDP and unemployment level have inverse relationship with each other. When one increases other declines and vice versa. Here in the case discussed above we have increased level of real GDP which according to Philips curve increases reduces unemployment level.

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