Final answer:
GPM increases when average mark-up increases, most directly as a result of a decrease in production costs. Decreasing production costs allow a business to maintain or increase desired profits, enhancing GPM, whereas increases in production costs or changes in other market factors like supply, demand, and competition, affect GPM differently.
Step-by-step explanation:
The relationship between Gross Profit Margin (GPM) and average mark-up in relation to various market factors. The correct answer to this question is that GPM increases when the average mark-up increases due to a decrease in production costs. This is because a lower cost of production allows a firm to maintain or increase its desired profit margin without increasing the price to the customer, which can enhance the GPM. A reduction in supply or an increase in demand, on the other hand, may influence market prices but does not directly affect the GPM through the mark-up process. Similarly, increased competition usually leads to reduced mark-ups as firms compete for market share. Hence, these options are less directly related to changes in GPM due to average mark-up adjustments. Furthermore, as stipulated in the provided references, if the cost of production increases, the firm will need to increase the product's price in order to maintain its desired profit. This could potentially lower the GPM unless the mark-up is also increased. Conversely, when production costs decrease, there is room for higher GPM if sales prices are maintained.