Final answer:
A decrease in labor costs leads to an increase in aggregate supply, as it allows firms to supply more at every price level, increasing the equilibrium quantity and potentially decreasing the equilibrium price.
Step-by-step explanation:
A decrease in labor costs will cause aggregate supply to increase. This is because when labor costs go down, it becomes cheaper for firms to produce goods and services, which allows them to supply more at every price level. In both the product market and the labor market, when there is an increase in supply, the equilibrium quantity typically increases while the equilibrium price tends to decrease as suppliers are willing to accept less to sell more of their product.
In the context of the labor market specifically, supplying labor into the market is affected by the wage rate. A higher wage motivates more labor participation versus leisure activities, increasing labor supply. Conversely, lower wages tend to decrease labor supply as workers may opt for leisure or search for better opportunities. This interplay influences the overall aggregate supply in the economy.