ACCA Performance Management (F5) Certification Practice Exam

What impact does a decrease in price typically have on the quantity demanded?

1. Decreases the quantity demanded

2. Has no effect on the quantity demanded

3. Increases the quantity demanded

4. Only affects high-end products

The correct answer is: Increases the quantity demanded

A decrease in price typically leads to an increase in the quantity demanded due to the law of demand, which states that, all else being equal, if the price of a good or service falls, consumers will generally purchase more of it. This relationship occurs because lower prices make the product more affordable, allowing consumers who were previously unable to buy it to do so, and encouraging existing consumers to buy additional units. Additionally, as prices fall, the relative value or benefit that consumers perceive from the product increases, further driving up the quantity demanded. Market dynamics also play a role, as lower prices can stimulate consumer interest and competition, pushing demand higher. Other options do not align with this principle. For instance, a decrease in price leading to a decrease in quantity demanded contradicts economic theory, while the assertion that it has no effect overlooks the fundamental behavior of consumers in response to pricing changes. The notion of only affecting high-end products is too narrow, as price decreases can influence demand across a wide range of goods and services, not just luxury items.