The supply curve illustrates that firms:
A) increase the supply of a good when its price rises.
B) decrease the quantity supplied of a good when input prices rise.
C) increase the quantity supplied of a good when its price rises.
D) decrease the supply of a good when its price rises.
The correct answer and explanation is:
Correct Answer: C) increase the quantity supplied of a good when its price rises.
The supply curve is a fundamental concept in microeconomics that shows the relationship between the price of a good and the quantity that producers are willing to supply. The typical supply curve slopes upward from left to right, indicating a direct or positive relationship between price and quantity supplied. This means that as the price of a good increases, the quantity supplied by firms also increases, assuming other factors remain constant.
The reason for this relationship lies in the motivation of producers to maximize profit. When the price of a good rises, selling that good becomes more profitable. Firms are thus incentivized to produce and sell more of the product to take advantage of the higher market price. In contrast, if the price falls, the good becomes less profitable to produce, and firms are likely to reduce their output.
It is important to distinguish between a change in supply and a change in quantity supplied. A change in supply refers to a shift in the entire supply curve due to factors like changes in production technology, input prices, taxes, or number of sellers. On the other hand, a change in quantity supplied is represented by a movement along the supply curve and is solely caused by a change in the price of the good.
Therefore, the correct answer is that firms increase the quantity supplied of a good when its price rises, not because of changes in other economic factors, but due to the profit motive in response to higher prices. This principle is one of the foundational elements in understanding how markets allocate resources efficiently through the forces of supply and demand.