Final answer:
Higher costs of production lead to a shift in the aggregate supply curve to the left, indicating a decrease in quantity supplied for any given price, often resulting in a higher equilibrium price level.
Step-by-step explanation:
When a firm experiences higher costs of production, its profitability at any given selling price decreases. This scenario forces the firm to adjust the quantity of goods it is willing to supply at a specific price point. Economically, this is represented by a shift in the aggregate supply curve to the left. This leftward shift indicates that, for each price level, the quantity supplied will decrease. As the supply curve shifts left, the new equilibrium where supply meets demand will be at a lower quantity and typically at a higher price level. Therefore, the correct option for the question about the effect of higher costs of production is:
- A shift in the aggregate supply curve to the left.
This result is due to the relationship between the cost of producing goods and the willingness of businesses to supply them. An increase in production costs makes supplying the same quantity at the previous price less attractive, causing suppliers to reduce the quantity supplied unless prices increase. Consequently, in a competitive market, this leads to a rise in equilibrium prices as the supply decreases, illustrating the fundamental principles of supply and demand.