In a competitive market, why does the supply curve typically slope upward?

• A. As price rises, the number of buyers in the market increases, shifting supply outward along the supply curve.
• B. As price rises, producers face lower marginal costs due to diminishing returns, so they supply more.
• C. As price rises, firms have an incentive to supply more because higher prices make producing additional units more profitable (and marginal cost tends to rise as output increases).
• D. As price rises, consumers demand more of the good, forcing firms to supply more at every price.

Answer: (C)

Verified step by step guidance

1. Understand the definition of the supply curve: it shows the relationship between the price of a good and the quantity that producers are willing and able to supply.
2. Recall that in a competitive market, firms aim to maximize profit, which depends on the difference between price and marginal cost of production.
3. Recognize that as price increases, producing additional units becomes more profitable because the revenue from selling each extra unit rises.
4. Note that marginal cost typically increases with output due to diminishing returns, so firms will only supply more if the price covers these higher marginal costs.
5. Conclude that the supply curve slopes upward because higher prices provide an incentive for firms to increase quantity supplied, balancing rising marginal costs with higher potential profits.