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You have just seen that when the equilibrium point moves to the right we are more likely to experience economic growth. This could happen due to either demand factors or supply factors. It is important that you are able to analyse both sides of the market.


In this instance, if the supply curve moved to the left we would not conclude that the economy had moved into recession. A recession is categorised by a lack of demand; poor supply side conditions are more likely to result in a situation known as stagflation. This can be defined as the simultaneous occurrence of high inflation and high unemployment. In order to avoid these problems, the supply side of the economy needs to be managed effectively.

Once again, we will explore this skill by modelling a response to a sample question. You will be pleased to note that the structure which you learned in the previous section will also apply here. This is also likely to be a four mark question, and so we will use the same four step process that you have already seen.


In this case you have been asked about the price of raw materials. This is a term used in Economics to cover all of the goods and services that are used in the production process. In other words, they are the “building blocks” of production; we combine raw materials to create goods and services.

For example, if you were making bread, your raw materials would include water, flour, salt and yeast. On the other hand, the flour had to come from somewhere – for the business making the flour, wheat would be a raw material. Businesses that build houses would consider bricks, concrete and plumbing supplies to be raw materials.


In this instance we are not looking at spending; we are looking at production. That means that we will need to create a different sort of "link". In very general terms, we can use three different ideas to link a factor to aggregate supply.


As you can see from the table above, the price of raw materials is a cost of production.

If you are making a supply side link, you must use one of the terms from the left hand side of the table above.


In this question, you were asked to explore what would happen if the price of raw materials falls. When that happens, the margin received for each sale will increase. For example, if an item costs me $20, and I sell it for $35, then my margin is $15. If the cost price falls, my margin will increase.

This will encourage me to sell more of that item. An economist would say that I will allocate more of my scarce resources to that item, because each additional sale will result in a larger increase in my standard of living than it did before. As a result, we can expect the aggregate supply curve to shift to the right.


Once again, you must always remember to finish your response by answering the question that you were asked. We have just seen that the aggregate supply curve will shift to the right, and therefore the equilibrium point will also move to the right. When this happens, we can expect economic growth to increase.

Your final answer might read like this:

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