Certified Residential Appraiser Practice Exam

What happens to price and quantity when supply increases?

1. Price increases and quantity decreases

2. Price decreases and quantity increases

3. Both price and quantity increase

4. Price remains constant while quantity increases

The correct answer is: Price decreases and quantity increases

When supply increases, there is a shift to the right in the supply curve, indicating that producers are willing to sell more of the good at every price point. This increased availability typically leads to a decrease in the market price, as the greater supply results in sellers competing more for buyers. With the price dropping, consumers are more inclined to purchase the good, resulting in an increase in the quantity demanded. Thus, the overall effect of an increase in supply is that the price decreases while the quantity of goods sold in the market increases. This relationship illustrates the basic principles of supply and demand in microeconomics, highlighting how changes in supply can directly affect price and quantity in the market.