In a competitive market, why do supply curves typically slope upward (as price rises, quantity supplied increases)?

• A. Because consumers buy more when prices rise, forcing firms to supply more.
• B. Because higher prices make producing additional units more profitable, so firms expand output (often with increasing marginal cost).
• C. Because higher prices always reduce marginal cost, allowing firms to produce more at lower cost.
• D. Because firms are required by law to increase production when market prices increase.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the supply curve: it shows the relationship between the price of a good and the quantity that producers are willing to supply.
2. Recognize that in a competitive market, firms aim to maximize profit, which is the difference between total revenue and total cost.
3. Recall that producing additional units usually involves increasing marginal costs, meaning it becomes more expensive to produce each extra unit as output rises.
4. Explain that when the market price increases, the revenue gained from selling additional units also increases, making it profitable for firms to produce more despite higher marginal costs.
5. Conclude that this incentive to produce more at higher prices causes the supply curve to slope upward, reflecting the positive relationship between price and quantity supplied.