Which of the following best describes the bullwhip effect in economics?

• A. A sudden increase in supply causes prices to fall sharply in the market.
• B. The effect of government intervention is always to stabilize market prices.
• C. Small fluctuations in consumer demand can lead to increasingly larger fluctuations in orders and inventories up the supply chain.
• D. Producers always respond to changes in demand with proportional changes in production.

Answer: (C)

Verified step by step guidance

1. Understand that the bullwhip effect refers to the phenomenon in supply chains where small changes in consumer demand cause progressively larger fluctuations in orders and inventories as you move upstream from retailers to wholesalers to manufacturers.
2. Recognize that this effect is not about price changes directly, but about the variability in order quantities and inventory levels caused by demand signal distortions.
3. Eliminate options that describe price changes or government intervention, as these do not capture the essence of the bullwhip effect.
4. Focus on the option that highlights how small fluctuations in consumer demand lead to larger fluctuations in orders and inventories up the supply chain, which is the core concept of the bullwhip effect.
5. Conclude that the correct description of the bullwhip effect is the one emphasizing the amplification of demand variability through the supply chain.