In a competitive market, why is the individual firm’s supply curve (and thus the market supply curve) typically upward sloping?

• A. Because average fixed cost rises with output, forcing firms to charge higher prices as quantity increases.
• B. Because marginal cost generally rises as output increases, so a higher price is needed to induce firms to supply more.
• C. Because demand is perfectly inelastic, so firms must raise prices to sell additional units.
• D. Because marginal benefit to consumers rises as output increases, causing firms to supply more at higher prices.

Answer: (B)

Verified step by step guidance

1. Understand that a firm's supply curve in a competitive market is derived from its marginal cost (MC) curve above the average variable cost (AVC). This is because firms decide how much to produce by comparing the market price to their marginal cost of production.
2. Recall the concept of marginal cost: it is the additional cost of producing one more unit of output. Typically, due to the law of diminishing marginal returns, marginal cost increases as output increases.
3. Recognize that when marginal cost rises with output, the firm will only supply additional units if the market price is high enough to cover these increasing costs. This creates an upward-sloping supply curve for the individual firm.
4. Extend this reasoning to the market supply curve, which is the horizontal summation of all individual firms' supply curves. Since each firm's supply curve slopes upward, the market supply curve also slopes upward.
5. Note why other options are incorrect: average fixed cost does not rise with output (it actually falls), demand elasticity relates to consumers not firms, and marginal benefit to consumers affects demand, not supply.