Increasing marginal cost of production explains
Multiple Choice
the income effect.
why the supply curve is upsloping
the law of demand.
why the demand curve is downward sloping
The correct answer and explanation is :
The correct answer is: why the supply curve is upsloping.
Explanation:
The concept of increasing marginal cost of production is directly tied to the behavior of the supply curve in microeconomics. Marginal cost refers to the additional cost incurred by producing one more unit of a good or service. In many cases, as production increases, the cost of producing each additional unit rises due to factors like limited resources, lower productivity of labor, or diminishing returns to scale. This phenomenon is known as increasing marginal cost.
Here’s how increasing marginal cost explains why the supply curve slopes upward:
- Law of Supply: The law of supply states that, all else being equal, producers are willing to offer more of a good at higher prices. This is because higher prices help cover the increased costs associated with producing more units. If the marginal cost increases as production rises, producers need higher prices to justify producing additional units.
- Marginal Cost and Price: When marginal cost rises, producers are only willing to supply additional units if they can get a higher price to cover the increasing costs. Therefore, as price rises, the quantity supplied increases, leading to an upward-sloping supply curve. This relationship is reflected in most production scenarios where firms face increasing costs as output expands.
- Rising Marginal Costs: In the short run, firms typically experience increasing marginal costs because as they use more of a fixed resource (e.g., machinery or land), the efficiency of production tends to decrease. For example, when factories are operating at full capacity, each additional unit of production requires more labor and materials, which pushes up the marginal cost.
Thus, the supply curve reflects the need for higher prices to incentivize producers to offer more output, which is driven by the increasing marginal cost of production.
This concept is not related to the income effect, the law of demand, or why the demand curve slopes downward, as those are concepts tied to consumer behavior and market demand rather than the cost structure of firms.