In a competitive market, why does the supply curve typically slope upward (i.e., show a positive relationship between price and quantity supplied)?

• A. Higher prices make it profitable for firms to produce additional units even though marginal cost rises as output expands.
• B. Higher prices shift the supply curve left because firms face higher input costs.
• C. Higher prices reduce consumers' willingness to buy, causing firms to cut production.
• D. Higher prices increase marginal utility, so firms supply more to satisfy consumer preferences.

Answer: (A)

Verified step by step guidance

1. Understand that the supply curve represents the relationship between the price of a good and the quantity that producers are willing to supply.
2. Recall the concept of marginal cost, which is the additional cost of producing one more unit of output. Typically, marginal cost increases as output expands due to factors like limited resources or inefficiencies.
3. Recognize that firms aim to maximize profit, so they will produce additional units only if the price they receive covers the marginal cost of producing those units.
4. Therefore, when the market price rises, it becomes profitable for firms to increase production despite rising marginal costs, leading to a higher quantity supplied.
5. This positive relationship between price and quantity supplied explains why the supply curve slopes upward in a competitive market.