Why is the supply curve typically upward sloping?

The supply curve is typically upward sloping because as prices increase, producers are willing to supply more of a good or service.

In economics, the law of supply states that, all else being equal, an increase in price results in an increase in the quantity supplied. This is represented graphically by an upward sloping supply curve. The reason behind this is tied to the profit-maximising behaviour of firms. When the price of a good or service increases, it becomes more profitable for firms to produce and sell. This incentivises them to increase their production, hence the quantity supplied increases.

Moreover, as firms increase production, they often face increasing marginal costs. This is due to the law of diminishing returns, which states that as more of a variable input (like labour) is added to a fixed input (like capital), the additional output produced from each additional unit of the variable input will eventually decline. As a result, firms need a higher price to cover these increasing marginal costs, which further contributes to the upward slope of the supply curve.

Additionally, in the short run, firms may have spare capacity which they can utilise when prices rise. However, in the long run, if prices remain high, firms can also increase their capacity by investing in more capital, hiring more workers, or adopting new technologies. This expansion of production capacity also leads to an increase in the quantity supplied, reinforcing the upward slope of the supply curve.

IB Economics Tutor Summary: In simple terms, the supply curve slopes upwards because higher prices make it more worthwhile for companies to produce more. This is down to firms aiming to maximise profits, the costs of making goods increasing as they produce more, and the ability to use or expand their resources to make even more goods when prices stay high.