Final answer:
Each sector should theoretically increase production by as many units as the increase in demand, according to the principle of supply and demand. However, factors such as output price, input cost, profitability, and workforce capacity can affect the actual increase in production.
Step-by-step explanation:
When the external demand for products in each of the sectors increases by 1 unit, each sector should theoretically increase production by 1 unit to match the increased demand. This encompasses what could be referred to as the basic law of supply and demand.
However, in practice, several factors could affect this. For instance, if the prices of the outputs that businesses sell increase while input prices remain the same, this could encourage a surge in aggregate supply. In such a scenario, producers may increase production more than the initial 1 unit increase in demand to capitalize on the higher output prices and increased profitability.
This increase in production is facilitated by the demand for more labor to ramp up production. Therefore, based on the situation, the increase in production may vary from sector to sector. Take note that strategy will be dictated by the potential for increased profitability, balancing the cost of increased labor and other inputs against the projected income from the increased demand.
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