ASVAB (Armed Services Vocational Aptitude Battery)Paragraph Comprehension (PC)Medium
Read the following passage: "The concept of supply and demand is a fundamental principle in economics that describes the interaction between the availability of a product or service (supply) and the desire for it (demand). Generally, when demand for a product increases and supply remains constant, the price of the product tends to rise. Conversely, if supply increases and demand remains constant, the price tends to fall. This inverse relationship between supply and price, and direct relationship between demand and price, helps determine market equilibrium. However, external factors such as government regulations, technological advancements, and changes in consumer preferences can significantly shift either the supply or demand curves, leading to new equilibrium points and price adjustments. Understanding these shifts is crucial for predicting market behavior." According to the passage, what happens to the price of a product when its supply increases while demand remains unchanged?
- AThe price tends to fall.
- BThe price remains constant.
- CThe price becomes unpredictable.
- DThe price tends to rise.
Show answer & explanationAnswer & explanation
Correct answer: A. The price tends to fall.
The passage explicitly states, 'if supply increases and demand remains constant, the price tends to fall.'
Why the other options are wrong
- B. This would only happen if both supply and demand remained constant, or if changes perfectly offset each other.
- C. The passage describes a predictable outcome under these conditions.
- D. This occurs when demand increases or supply decreases.
Supply and Price Relationship
Assuming demand is constant, an increase in the supply of a good or service typically leads to a decrease in its market price.
- More availability reduces scarcity.
- Producers may lower prices to sell excess.
- This is an inverse relationship.
Memory trick: More Supply, Sales Slide; More Demand, Dollars Expand.