If the market power of firms increases, what happens in the AD/AS model?
A) Aggregate supply shifts to the left.
B) Aggregate supply shifts to the right.
C) Aggregate demand shifts to the left.
D) Aggregate demand shifts to the right.

Question

Quizplus · Accepted Answer

An increase in market power of firms leads to a decrease in competition, allowing these firms to increase prices and reduce output. This results in a decrease in the overall level of production and aggregate supply shifts to the left. This is because, in the short-run, higher prices lead to lower real wages and increased unemployment, which reduces the quantity of goods and services that firms are willing to supply.

If the Market Power of Firms Increases, What Happens in the AD/AS