Question

If the price of a product rises and as a result businesses increase their production, then \- (LO5) a) supply has increased b) supply has decreased c) quantity supplied has increased d) quantity supplied has decreased e) both supply and quantity supplied have increased

Short answer

Since businesses increase their production as a result of the increase in the price of the product, the quantity supplied has increased. Therefore, the correct answer is c) quantity supplied has increased.

Step-by-step solution

Understanding the Concepts of Supply and Quantity Supplied

Supply refers to the entire relationship between the quantities that producers are willing and able to produce at various prices. The quantity supplied, on the other hand, refers to the specific quantity that producers are willing and able to produce at a particular price level.

Analyzing the Effect of Price Increase on Production

When the price of a product increases, it means that producers can receive higher revenue for their product. As a result, they have an incentive to increase their production and sell more units of the product. This increased production due to the increase in price is a change in the quantity supplied.

Determine the Correct Answer

Since the businesses increase their production as a result of the increase in the price of the product, the quantity supplied has increased. Supply, however, refers to the overall relationship between price and quantity, and we do not have information about how this relationship has changed. Therefore, the correct answer is: c) quantity supplied has increased

Key concepts

Understanding Supply and Demand

Supply and demand are fundamental economic concepts that explain how prices and quantities of goods and services are determined in a market economy. Supply refers to the total amount of a good or service that producers are willing to sell at different price levels. As prices increase, suppliers are typically willing to offer more of their goods, as it becomes more profitable. Conversely, if prices drop, they might supply less because it yields lower returns.

Demand, on the other hand, signifies consumers' desire to purchase goods and services, and their willingness to pay different prices. Typically, as the price of a good goes up, the demand for it tends to decrease because consumers either can't afford it or they find cheaper alternatives, demonstrating an inverse relationship between price and quantity demanded.

The intersection of supply and demand curves determines the market equilibrium, where the quantity demanded equals the quantity supplied, resulting in an equilibrium price. In-depth understanding of supply and demand help students grasp how markets function, why prices fluctuate, and how external factors, like changes in consumer preference or production costs, can shift these curves.

Quantity Supplied

Quantity supplied revolves around a specific point on the supply curve, signifying how much of a product producers are willing to sell at a particular price. It's vital to recognize that quantity supplied is not the overall supply curve, but rather a single point on that curve corresponding to a specific price.

Any movement along the supply curve represents a change in quantity supplied, not in supply itself. For instance, if producers see an increase in the price they get for their product, they typically move up along the supply curve to a higher quantity supplied as a response to the price change. This is exactly what happens in the exercise: when the price rises, the quantity supplied increases in response.

Students often confuse a movement along the supply curve with a shift of the supply curve, but the latter represents a change in supply, which is caused by factors other than the price of the product itself, like technological advancements or changes in the cost of inputs. Understanding this distinction is crucial for accurately analyzing market behaviors and outcomes.

Price Effect on Production

Price plays a pivotal role in the decision making of producers concerning how much of a product to produce. When the price of a product or service increases, it's an incentive for businesses to expand production because they anticipate higher potential profit margins. This economic mechanism is known as the price effect on production.

The exercise illustrates this concept: a price rise leads to increased production, which demonstrates the positive relationship between price and quantity supplied in the short term. It's essential to note that this is considered a movement along the supply curve and not a shift in the supply curve itself.

Moreover, if the price increase is seen as lasting, companies might invest in new technologies or hire more workers to increase production capacity. However, such long-term production decisions are not reflected in the immediate change in the quantity supplied. They may eventually lead to a rightward shift in the supply curve, indicating an increase in the overall supply. Helping students understand the price effect on production can offer them insights into business decision-making and market dynamics.