Question

"Falling oil prices have caused a sharp decrease in the supply of oil." Speaking precisely, and using terms as they are defined by economists, choose the statement that best describes this quotation.

a The quotation is incorrect: A decrease in price always causes an increase in supply, not a decrease in supply.
b The quotation is correct: A decrease in price always causes a decrease in supply.
c The quotation is incorrect: A decrease in price causes an increase in quantity supplied, not a decrease in supply.
d The quotation is incorrect: A decrease in price causes a decrease in quantity supplied, not a decrease in supply.

Answer 1

The answer is: D) The quotation is incorrect: A decrease in price causes a decrease in quantity supplied, not a decrease in supply.

Step-by-step explanation:

A decrease in the price of a product or service will always decrease the quantity supplied and increase the quantity demanded of the product. The terms supply and demand apply to the entire curve, not an specific point in them.

For example, the equilibrium point for milk is 5 million gallons sold at $3 each. If the government suddenly decides that it will place a price ceiling for milk at $2 per gallon (may use argument that it is a necessity good essential for the well being of children) the quantity demanded for milk will rise but the quantity supplied will fall.

That is because not every dairy business will be able to produce and sell milk at $2 and still make a profit (or meet their expected profit levels), so they will either lower their milk production (make substitute products) or go out of business.