Future Business Leaders of America (FBLA) Business Management Practice Test

When the price of a product decreases, how does it affect company supply?

1. Companies are generally willing to supply more

2. Companies are less willing to supply more

3. Supply remains unchanged

4. Supplies become more expensive

The correct answer is: Companies are less willing to supply more

When the price of a product decreases, this typically leads to companies being less willing to supply more of that product. The fundamental economic principle at work here is the law of supply, which states that there is a direct relationship between price and the quantity supplied. When prices drop, the revenue and profit margins that companies earn on each unit sold also decrease, making it less attractive for them to produce and supply the same quantity of goods as before. A decline in price may cause companies to reassess their production levels, often leading them to reduce supply. This can happen because the lower price may not cover the costs of production, prompting them to either cut back on output or focus on more profitable items instead. This rationale aligns with the basic nature of business—companies aim to maximize profits, and a falling price usually signals a shrinking incentive to expand supply. In contrast to this understanding, if prices were to rise, companies would typically be more inclined to increase supply to take advantage of higher potential revenues. Thus, the decrease in price directly correlates with a lesser willingness to supply more products.