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:
Correct Answer: B) the supply of bread decreases.
When the price of a key input such as flour increases, the cost of producing bread also increases. Flour is a primary ingredient in bread production, so any rise in its price makes it more expensive for bakeries and bread manufacturers to produce the same quantity of bread. This situation leads to a decrease in the supply of bread, because producers are either unable or unwilling to supply as much bread at the previous prices due to increased production costs.
A decrease in supply means that the supply curve shifts to the left. At every possible price point, a smaller quantity of bread is now offered for sale than before. Importantly, this is not a change in the quantity supplied due to a change in the price of bread itself, but a shift in the entire supply curve caused by a change in the price of an input.
This scenario does not affect the demand for bread directly. Consumers are not making decisions based on the price of flour; instead, they react to the price of the final product, bread. However, if the reduced supply leads to higher prices for bread, some consumers may buy less, but that would be a secondary effect resulting from the supply-side change, not a direct decrease in demand.
Option A is incorrect because an increase in input prices does not cause demand to increase. Option C is wrong because it refers to a change in demand rather than supply. Option D is incorrect because higher production costs reduce supply, not increase it.
In conclusion, when the price of flour rises, the cost to make bread rises, leading producers to supply less. Therefore, the correct economic response is that the supply of bread decreases.