Problem 9 What is wrong with this statemen... [FREE SOLUTION]

Chapter 3: Problem 9

What is wrong with this statement: As the price of a good falls, the supply of that good falls, ceteris paribus.

Short Answer

Expert verified

The statement seems to confuse the change in quantity supplied with a change in supply. A decrease in price would not cause the supply to 'fall', but it could reduce the quantity that producers are willing to supply.

Step by step solution

Understanding the concept of supply

The supply is defined by the quantity of a good that the producers are willing to sell at different prices at a particular period of time. According to the law of supply, there is a direct relationship between price and quantity supplied: when the price increases, the quantity supplied also increases, and vice-versa.

Analyzing the statement

In the statement 'As the price of a good falls, the supply of that good falls, ceteris paribus', it seems to suggest a direct relationship between the drop in price and a decrease in supply. Given the law of supply, this fall in price would usually cause a reduction in the quantity suppliers are willing to provide, not necessarily a fall in the entire supply.

Clarifying the misconception

If the statement implied that a decrease in the price of a good leads to less of it being made available for sale by suppliers, it would be somewhat true. But if we're referring to the supply curve, it wouldn't shift or 'fall' due to a price change. The change in quantity supplied, which moves along the supply curve, should not be confused with a shift in the supply curve itself. The latter only occurs when there's a change in something other than price that affects producers' willingness to sell, such as production costs, technology, or sellers' expectations about future prices.