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A-Level Economics · AD shift left (recession) diagram question
Why does unemployment RISE as the economy moves from E to F?
The diagram
The answer
Labour is a derived demand — less demand for goods and services means firms need fewer workers. Derived demand, run backwards: the demand for the good determines the demand for the worker. Less output produced, fewer workers needed. You can always say labour is a derived demand — the demand for the overall good or service determines the demand for the worker. Output falls from Y₁ to Y₂, so firms need fewer workers to produce it, and cyclical unemployment rises. Same sentence as the boom case, just pointed the other way.
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