Flour is used to produce bread. If the price of flour increases: A) the demand for bread increases. B) the supply of bread decreases. C) the demand for bread decreases. D) the supply of bread increases.
The correct answer and explanation is:
The correct answer is: B) the supply of bread decreases.
Explanation:
Flour is a key input or raw material in the production of bread. When the price of flour rises, the cost of producing bread also increases. This increase in production costs makes it more expensive for bakers and bread producers to make the same amount of bread as before.
In economics, supply refers to the quantity of a good that producers are willing and able to sell at different prices. When the cost of an important input like flour rises, it generally causes the supply curve for the final product (bread) to shift to the left. This means that at every possible selling price, producers will supply less bread because producing it is more costly.
The higher input cost reduces producers’ profitability if they keep supplying the same amount at previous prices. Unless the price of bread rises enough to cover the increased cost, producers tend to reduce the quantity supplied. This leads to a decrease in supply.
On the other hand, demand for bread is determined by consumers’ willingness and ability to buy bread at different prices. The price increase of flour does not directly affect consumers’ preferences or income, so demand for bread does not necessarily change just because flour prices go up.
Option A (demand for bread increases) is incorrect because a rise in flour price does not make bread more desirable to consumers. Option C (demand for bread decreases) is also incorrect because demand depends on consumers’ preferences and income, not production costs. Option D (supply of bread increases) is wrong because higher input costs typically reduce supply.
In summary, a price increase in flour leads to a higher production cost, causing the supply of bread to decrease as producers cut back on production or raise bread prices to cover costs.