Question

In microeconomics, what does the existence of a supply curve imply about producer's market power?
Explain what causes supply curves to slope upward.

Answer 1

1) In microeconomics, what does the existence of a supply curve imply about producer's market power?

Answer: The supply curve represents the marginal cost curve for the producer. The producer surplus refers to the difference between the price received for a product and the marginal cost to produce it. When a firm exercises its market power, it raises the producer surplus, reduces the consumer surplus, and creates a deadweight loss

2) what causes supply curves to slope upward

Answer: There are three main reasons what causes supply curves to slope upwards from left to right displaying a positive relationship between the market price and quantity supplied:

1) The profit motive: When the market price increases following a rise in demand, it becomes more profitable for a firm to increase their output

2) New entrants coming into the market: Higher prices may provide an incentive for other firms to enter the market leading to a rise in total supply

3) Production and costs: When there is an expansion of output, a business production costs tend to increase, thus a higher price is required to cover these extra costs of production. It is due to the effects of diminishing returns as more factor inputs are added to the process of production.