The law of supply tells us that other things remaining the same, as the
A) price of gasoline falls, the quantity of gasoline supplied decreases.
B) price of gasoline rises, the quantity of gasoline supplied decreases.
C) supply of gasoline increases, the price of gasoline falls.
D) cost of producing gasoline falls, the supply of gasoline will increase.
E) cost of producing gasoline increases, the price of gasoline rises.
The correct answer and explanation is :
The correct answer is A) price of gasoline falls, the quantity of gasoline supplied decreases.
Explanation:
The law of supply is a fundamental concept in economics that describes the relationship between the price of a good and the quantity of the good that producers are willing and able to supply to the market. Specifically, the law of supply states that other things being equal, as the price of a good increases, the quantity supplied of that good also increases, and conversely, as the price decreases, the quantity supplied decreases.
This relationship occurs because producers typically seek to maximize profits. When the price of a good rises, it becomes more profitable for producers to supply more of that good to the market. On the other hand, when the price of a good falls, the profitability decreases, and producers may not find it worth their while to produce and supply as much of that good.
Now, let’s break down the options:
- Option A: “Price of gasoline falls, the quantity of gasoline supplied decreases.” This is correct because it aligns with the law of supply. When the price of gasoline decreases, producers may be less inclined to supply large quantities because the potential profit is lower.
- Option B: “Price of gasoline rises, the quantity of gasoline supplied decreases.” This is incorrect because if the price rises, the quantity supplied should increase, not decrease, according to the law of supply.
- Option C: “Supply of gasoline increases, the price of gasoline falls.” This is a misunderstanding of the law of supply. While an increase in supply could lead to a lower price, it doesn’t directly reflect the law of supply, which focuses on the relationship between price and quantity supplied.
- Option D: “Cost of producing gasoline falls, the supply of gasoline will increase.” This is related to the law of supply, but it’s about supply curve shifts, not the law itself. A fall in production costs can make producers willing to supply more at any given price, shifting the supply curve to the right.
- Option E: “Cost of producing gasoline increases, the price of gasoline rises.” While this statement might be true in the broader market context (as higher production costs can lead to higher prices), it is not directly related to the law of supply. The law of supply is more concerned with the price and quantity supplied relationship, not production costs.
Therefore, A is the most accurate answer because it directly reflects the principle outlined by the law of supply.