In a competitive market, why is the supply curve for a good typically upward sloping?

• A. Because demand is downward sloping, supply must slope upward to clear the market.
• B. Because higher prices make it profitable for firms to produce additional units, even though marginal cost rises as output expands.
• C. Because higher prices reduce consumers' willingness to buy, forcing firms to cut production.
• D. Because firms face a fixed marginal cost, so quantity supplied rises one-for-one with price.

Answer: (B)

Verified step by step guidance

1. Understand that the supply curve represents the relationship between the price of a good and the quantity that firms are willing to produce and sell.
2. Recognize that in a competitive market, firms aim to maximize profit, which means producing up to the point where marginal cost (MC) equals the market price (P).
3. Recall that marginal cost typically increases as output expands due to factors like limited resources or diminishing returns, making it more expensive to produce additional units.
4. Explain that when the market price rises, it becomes profitable for firms to produce more units despite the rising marginal cost, leading to an increase in quantity supplied.
5. Conclude that this positive relationship between price and quantity supplied results in an upward sloping supply curve, reflecting firms' profit-maximizing behavior in response to changing prices.