Future Business Leader Achievments (FBLA) Economics Practice Exam

What typically happens when a producer reduces the price of a product?

1. The quantity supplied increases

2. The demand for the product decreases

3. The equilibrium price rises

4. The quantity supplied decreases

The correct answer is: The quantity supplied increases

When a producer reduces the price of a product, it typically leads to an increase in the quantity supplied. This is because lower prices often stimulate sales, making the product more attractive to consumers. As a result, producers may respond by increasing the production of that product to meet the anticipated higher demand. In this context, the principle of supply states that all else being equal, an increase in price usually leads to an increase in the quantity supplied as producers may wish to take advantage of higher prices. Conversely, when prices fall, the immediate incentive for producers to supply that product diminishes, yet in this scenario, the expectation is that a reduction in price will increase overall sales, thus motivating producers to produce more in the near term. The other choices do not align with the typical market behavior observed when prices decrease. For example, a decrease in the price of a product usually leads to an increase in demand rather than a decrease, as consumers are often more willing to buy more at lower prices. Additionally, when prices drop, the equilibrium price would actually tend to fall, not rise, and typically we wouldn't expect a decrease in quantity supplied without other factors influencing production decisions.