Question

What happens to quantity supplied when price is lowered? ( \(\mathrm{OO} 3)\) a) It rises. b) It falls. c) It stays the same. d) It cannot be determined if it rises, falls, or stays the same.

Short answer

b) It falls.

Step-by-step solution

Understanding the Law of Supply

The law of supply is an economic principle stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers are willing and able to provide, will also increase, and vice versa. This means that if the price is decreased, the quantity supplied would also decrease.

Analyze the Given Options

Now, let's analyze the available options to identify the correct one. a) It rises: This option contradicts the law of supply, which states that if the price is lowered, the quantity supplied will decrease. b) It falls: This option aligns with the law of supply, where a decrease in price leads to a decrease in quantity supplied. c) It stays the same: This option would not be accurate as supply typically responds to changes in price. d) It cannot be determined if it rises, falls, or stays the same: This option suggests that there is no clear relationship between price and quantity supplied. However, we know that the law of supply does provide a clear relationship between these two variables.

Select the Correct Option

Based on the law of supply and our analysis of each given option, we can now confidently select the correct answer: b) It falls.

Key concepts

Understanding Quantity Supplied

When we talk about quantity supplied, we are referring to the amount of a good or service that producers are willing to offer in the market at a specific price. This is a crucial part of the broader economic principle known as the law of supply.

Producers decide the quantity supplied based on the price levels, among other factors. As prices rise, suppliers are generally more motivated to supply more products because they can earn higher profits.

In contrast, when prices decrease, they might supply less because their potential earnings would be lower. Hence, "quantity supplied" is directly linked to specific market conditions, especially price levels. It's essential to understand that quantity supplied can adjust due to many factors, such as changes in production costs or technology advancements, but price is often the main driver.

Impact of Price Changes

Price changes have a profound impact on both suppliers and the market dynamics. According to the law of supply, there is a direct relationship between price and the quantity that producers are willing to supply.

When prices go up, producers see an opportunity to increase their profitability and often respond by increasing the production of goods. This is because a higher price generally means higher revenue per unit, which can offset any additional costs of ramping up production.

Conversely, if prices fall, the incentive to produce diminishes because the costs of production might outweigh the potential revenue. This is why suppliers tend to reduce the quantity supplied when prices drop. In real-world applications, these changes play a critical role in how markets function, influencing the availability of goods and services.

The Foundation of Economic Principles

Economic principles serve as the foundation for understanding how markets operate and are essential for making predictions about how changes in one part of the economy might affect the whole system.

One of the primary economic principles is the law of supply, which states that there is a direct relationship between the price of a good and the amount suppliers will produce. It's a fundamental concept that helps explain why markets function the way they do.

By adhering to such principles, economists can provide more accurate forecasts and assist both businesses and policy-makers in making informed decisions. Additionally, understanding economic principles like supply and demand helps us comprehend complex market trends and the behavior of different economic agents in the marketplace.