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

c) quantity supplied has increased

Step-by-step solution

Identifying the concepts

We need to understand the concepts of supply and quantity supplied to find the correct answer. Supply refers to the overall capacity of a business to provide a good or service, while quantity supplied refers to the actual amount of the good or service provided at a specific price.

Analysing the given situation

The price of a product has increased, and as a result, businesses increased their production. This means that at a higher price, businesses are providing more of the product.

Comparing the options

Let's evaluate the given options based on the analysis of the situation: a) supply has increased: The statement explains the situation but does not fully address the change in production. b) supply has decreased: This option is not correct, as businesses increased production, not decreased it. c) quantity supplied has increased: This option accurately describes the situation, where businesses have increased the amount provided at the higher price. d) quantity supplied has decreased: This option is not correct, as businesses increased production, not decreased it. e) both supply and quantity supplied have increased: This option includes the correct answer but adds an unnecessary component (increase in supply) that is not directly related to the given situation.

Finding the correct answer

Based on our analysis and comparison, the correct answer is: c) quantity supplied has increased

Key concepts

Understanding Supply and Demand

Supply and demand form the cornerstone of microeconomic concepts and define how markets operate. Supply refers to the entire capability of businesses to produce a good or service, including considerations like available resources and production capacity. Demand, on the other hand, represents the desire and capacity of consumers to buy goods and services at different prices.
In any market, the interplay between supply and demand determines the price and quantity of goods sold. A basic rule to remember is:

• When demand exceeds supply, prices tend to rise.
• When supply exceeds demand, prices tend to fall.

These forces push and pull against each other until they reach a point of balance, known as equilibrium, where the quantity supplied equals the quantity demanded.

Exploring the Price Effect

The price effect refers to how changes in the price of a product influence the quantity that is either supplied or demanded. When the price of a product increases, suppliers are typically willing to produce more of it to maximize their profits. This is known as an increase in quantity supplied.
Conversely, if the price drops, suppliers may reduce their production because it may not be profitable to produce at a lower price point. This relationship is key to understanding market dynamics and cause-and-effect scenarios:

• An increase in quantity supplied due to higher prices.
• A decrease in quantity supplied due to lower prices.

Consumers react similarly but in the opposite manner. Higher prices could decrease the quantity demanded, while lower prices often increase it.

Microeconomic Concepts Demystified

Microeconomics focuses on the behavior and decisions of individual entities, such as consumers and businesses, within an economy. Key concepts include supply and demand dynamics, price effects, and decision-making processes regarding resource allocation.
One important microeconomic concept is elasticity, which measures how much the quantity demanded or supplied changes in response to price changes. If a product is considered elastic, a small price change can lead to significant variation in the quantity demanded or supplied.

• Elastic goods: Often luxury items or goods with many substitutes.
• Inelastic goods: Necessities or items with few substitutes.

Understanding these concepts helps businesses predict consumer behavior and adjust their strategies accordingly, aiming for optimal production and pricing.