Question

Write down the definition of "supply curve".
Is the supply curve positively sloped or negatively sloped?
Explain why by pointing out the foundamental economic assumption that determines the slope of the supply curve.

Answer 1

1. Supply curve is the graphical presentation of correlation between price of a good or service and quantity supplied in a given period of time. Price is represented on y-axis (vertical xis); and quantity supplied on x-axis (horizontal axis).

2. Supply curve has a poitive slope as it indicates a direct relationship between price and quantity supplied. That is, higher the price, higher is the quantity supplied.

3. Positive slope of the supply curve indicates that producers need higher price in order to supply more quantity so that they can cover the higher marginal cost of poduction. As output increases, the opportunity cost of production increases. Due to higher prices, producers employ resources employed elsewhere in the productin of this good. So, the opportunity cost is higher as the resources are better for the production of the other good from where they were diverted. Also, at higher level of output, marginal cost of production increaes at an increasing rate due to the law of diminishing returns. Therefore, producers need higher price in order to supply higher quantity, thus making the supply curve positively sloped.