As one recommendation of a type of innovation that would permanently expand the productive capacity of...

As one recommendation of a type of innovation that would permanently expand the productive capacity of the economy, your Policy Brief team has modelled the effects of investing in scientific research that would develop ways to more effectively use renewable energy sources in production methods. This new innovation could then be widely disseminated for uptake by businesses throughout the economy. This new innovation would bring down the production costs for businesses, and enable the economy to make even more productive use of our existing resources. Illustrate the predicted effects of renewable energy innovation using an AD-AS diagram. Provide bullet points to explain what is happening in your diagram. As with all of your diagrams, be sure to indicate the original and new equilibrium points, and what happens to output and price level

Expert Solution

As per the given case, we know that innovation will help in production activities and will lower the cost of production for the producers. It will have a permanent effect on the production capacity of the economy. Innovation will also help producers to make more effective use of existing natural resources.

We know that when production cost is less and there is an increase in technology/innovation, producers are able to produce more than the usual output. This will increase the supply in the market and aggregate supply curve will shift to the right.

As per the graph, we can see that

Supply curve is shifted to the right.
Price level has decreased from P to P1.
Quantity supplied has increased from Q to Q1.
Equilibrium level has fallen down from E to E1.

Rahul Sunny answered 2 years ago

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