ACCA Performance Management (F5) Certification Practice Exam

Why is 'b' always negative in the equation P = a - bQ?

1. It indicates a positive relationship between price and quantity

2. It reflects a constant price level

3. It shows a negative relationship between price and quantity

4. It represents a decreasing cost structure

The correct answer is: It shows a negative relationship between price and quantity

In the equation P = a - bQ, the term 'b' is indeed always negative because it signifies the relationship between price (P) and quantity (Q) in the context of demand. This negative relationship is fundamental to economic theory, particularly the law of demand, which states that as the quantity of a good demanded increases, the price typically decreases, assuming all other factors remain constant. When 'b' has a positive value, the equation implies that an increase in quantity would result in a rise in price, contradicting the typical consumer behavior and expectations in a market economy. Thus, having 'b' as a negative factor in the equation aligns with this negative correlation, demonstrating that if quantity increases (Q becomes larger), the resultant price (P) decreases, assuming 'a' is a constant value representing a baseline price when Q is zero. Understanding this relationship is crucial for analyzing how price changes can affect consumer demand and is a foundational concept in price elasticity and market analysis. The other choices do not encapsulate the correct interpretation of the equation's structure in relation to market dynamics.