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A-Level Economics · AD shift right (with multiplier) diagram question

Why does unemployment fall as the economy moves from E to G?

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The diagram

The answer

Labour is a derived demand — firms hire because consumers want the goods those workers produce. Labour is a derived demand. More output demanded → more workers needed to produce it → cyclical unemployment falls. Firms only hire workers because consumers want the goods and services those workers produce — labour is a DERIVED demand. As demand for goods and services rises, firms need more workers to make the extra output, which directly reduces cyclical unemployment. Say the words 'derived demand' in the exam.

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