Which Statement Is Consistent With the Law of Supply?
The law of supply is a fundamental principle in economics stating that, all other factors being equal, as the price of a good or service increases, the quantity supplied of that good or service will increase, and vice versa. This relationship is positive; price and quantity supplied move in the same direction. Understanding this core principle is crucial for grasping how markets function.
Let's explore several statements and determine which aligns with the law of supply. To do this effectively, we'll address common questions surrounding the law of supply.
What is the Law of Supply? (Addressing a common PAA question)
The law of supply describes the direct relationship between the price of a product and the quantity producers are willing to offer for sale. Higher prices incentivize producers to supply more because they can earn greater profits. Conversely, lower prices reduce profitability, leading to a decreased supply. This relationship is depicted graphically as an upward-sloping supply curve.
How Does the Law of Supply Work in Practice? (Another potential PAA question)
Imagine the market for apples. If the price of apples rises from $1 to $2 per pound, apple farmers will likely increase their production. They'll plant more apple trees, hire more workers, and perhaps invest in more efficient harvesting techniques. This is because the increased price makes apple farming more profitable. Conversely, a drop in price to 50 cents per pound might incentivize some farmers to reduce production or even leave the market entirely, leading to a lower quantity supplied.
What are some examples of the law of supply in action? (Addressing a frequently asked question)
- Oil Prices: When oil prices are high, oil companies invest more in exploration and extraction, increasing the quantity of oil supplied. When prices fall, exploration and extraction slow down.
- Housing Market: If house prices rise significantly in a particular area, builders will be more likely to construct new homes, increasing the supply of housing. Falling house prices have the opposite effect.
- Smartphone Production: If consumer demand for a particular smartphone model is high, leading to high prices, manufacturers will increase production to meet this demand.
Which statement is consistent with the law of supply?
Here are a few example statements. Only one is consistent with the law of supply:
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Statement 1 (Correct): "As the price of gasoline increases, gas stations increase their supply of gasoline." This directly reflects the law; a higher price leads to a greater quantity supplied.
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Statement 2 (Incorrect): "As the price of bread decreases, bakeries increase their production of bread." This contradicts the law; lower prices lead to reduced supply.
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Statement 3 (Incorrect): "The supply of avocados remains constant even as the price rises." This shows no relationship between price and quantity supplied, contrary to the law of supply.
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Statement 4 (Incorrect): "A decrease in the price of cotton will lead to an increase in the production of cotton shirts." While related to supply, this describes a change in demand for cotton affecting the supply of shirts, not the direct price-supply relationship for cotton itself.
Therefore, only Statement 1 is consistent with the law of supply. It showcases the direct, positive relationship between price and quantity supplied that forms the core of this economic principle. Understanding this relationship is crucial for analyzing market dynamics and predicting producer behavior.
