Question

Describe what happens in the economy when there is an increase in the level of the factors of production (the endowment) in the short run and long run.

Answer 1

Factors of production include land, labor, capital and entrepreneurship. All factors if increased lead to a better economic growth and sustainability. Innovation and discovery play an important role in the advent of the increase in the factors of production. New inventions in technology which reduces human efforts and thereby increase the productivity and total output are always good for economic growth. With more goods produced with the increased efficiency, the prices of the goods available are cheaper than before. This makes available goods to everybody in the economy and raises the standard of living of the people of the economy. In the short run, the economy moves towards greater output at cheaper prices and in the long run the economy has a new equilibrium of demand and supply with new output and new price levels.