CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

An increase in production costs is most likely to shift the ______.

A. AS curve up
B. AS curve down
C. AD curve up
Correct Answer: A

The AS curve shifts up when firms face cost increases that force them to raise prices.

User Contributed Comments 12

User Comment
Xuezheng shouldn't it be B? when the production cost rises, firms would like sell less for a given price level of output.
justin yes firms will sell less at a given price, and the supply curve will shift up to reflect this change! A is correct.
justin yes firms will sell less at a given price, and the supply curve will shift up to reflect this change! A is correct.
Koko AS "curve" up ---> AS down
danlan Remember that the a-xis is AS and y-axis is price (not the reverse), that's why AS "curve" up means AS down. :)
anricus The AS curve is moving up TO THE LEFT therefore a decrease in AS
george2006 AS curve shifts up <==> quantity down, price up
ehc0791 shift leftward will be more accurate
olagbami supply curve shifting up is synnonymous with moving left.
ankurwa10 my intuition (may be wrong) says that since there is an increase in production costs, firms would now, up the output prices they charge, therefore, the point at which price level cuts on the AS Curve would be higher, thus shifting the AS curve upwards.
fzhou Just a quick note that the y-axis is price level. So the increase in production cost will result in higher price at a given level of output.
Huricane74 @Xuezheng,

There is a difference between a supply curve (s) for a firm and the short run aggregate supply curve (AG) for all firms for a market.

In regards to a single firm, with an increase in production costs, the firm will want to produce the same amount, but the quantity demanded will decease. In response, the firm will produce less at every price to bring the supply in line with the quantity demanded. This can be referred to as a leftward shift in the supply curve (s), which is the same thing as the supply curve shifting up. This is why the correct answer is A.

If you draw a graph with an increase in production costs, you can see how the supply curve shifts to the left /up.

In regards to the market, an increase in production costs will result in a leftward /upward shift in the short run aggregate supply curve. Eventually (over time), demand will increase, shifting the demand curve to the right /up. This results in an increase in prices (inflation) with the same market demand that we had prior to the increase in production costs.

Since supply is a function of Labor, Capital and Technology, the supply is constant unless one of these factors change.

In summary, the short run supply curve (SRAS) shifts left, the demand curve shifts right, resulting in higher prices in the long run with the same quantity supplied, provided that Labor, Capital and Technology have not changed.
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