At the peak of the business cycle, why do input prices tend to rise sh…

Question

At the peak of the business cycle, why do input prices tend to rise sharply?

Accepted Answer

B. Inputs grow scarce relative to their demand

1. The chapter explains that in the later stages of expansion inputs become difficult to find.
2. They are short of their demand, so input prices increase.
3. This points to inputs growing scarce relative to demand.
4. The "firms suddenly cut output" option is ruled out: at the peak output is at its highest, not suddenly cut.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 5 "Business Cycles", p.2_

Answer

Governments impose new input subsidies

Answer

Firms suddenly cut all production output

Answer

Consumers stop buying durable goods entirely

At the peak of the business cycle, why do input prices tend to rise sharply?

Keep practising Unit 1A: Scarcity, Choice and Opportunity Cost