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Why The Supply Curve Slopes Upward

The upward slope of the supply curve indicates that, other things being equal, an increase in price will result in an increase in the quantity supplied.

There are a couple of things at work here that cause this to occur. First, different producers face different cost constraints.

For instance, a farmer who has land that is fertile, well watered and not cluttered with rocks and trees, will be able to plant a crop and have it grow with relative ease. In contrast a farmer whose land is poor quality, lacks a good water supply and is covered with trees and rocks will have to invest a considerable amount of time and expense in first clearing it, and then planting a crop.

Since the land of the second farmer is of lower quality it will not produce as much as that of the first farmer unless the second farmer invests more money into fertilizer and an irrigation system. At a low price per bushel, our first farmer can grow the crop and make money while the second one cannot do this without incurring a huge financial loss.

However, as the price per bushel of the crop increases, farmers with lower quality land will find that they can invest the extra money needed to grow the crop and still make a profit so, as the price rises, more farmers will add to the supply of the product by growing it (of course, the farmers with the best land will make much larger profits since their costs are much lower, but the others will still enter so long as the crop is profitable).

As second reason why increasing prices for a good or service result in an increase in quantity is opportunity cost.  As the price of a good or service increases, the opportunity cost of producing other goods or services or of engaging in other activities also increases. 

For instance, prior to the creation of the Personal Computer, the production, sale and servicing of typewriters was a big business.  As PCs emerged, many companies engaged in the production, sale or servicing of typewriters began finding that they could get better returns by producing, selling and/or servicing PCs rather than typewriters. 

The opportunity cost of remaining in the typewriter business was the higher returns and larger amount of business available to those who switched to the production, sale and/or servicing of typewriters. 

Another example is the effect of higher wages on time spent on leisure or other activities.  As the wage available to an individual increases, the opportunity cost of engaging in other activities instead of work increases. 

I have often used the example (while the example is admittedly an extremely ridiculous one, it does illustrate the point nicely) of a student being approached by their supervisor asking them to work overtime on a given evening when they have a class.  Naturally, the student will turn down the offer citing the need to attend class. 

However, assume the employer is extremely desperate, and offers say $1,000 for four hours of work.  Even if there is a test scheduled that evening, it would probably be worth the student's while to skip class and earn the $1,000.   However, it will probably not make sense to skip class if the employer simply offers to pay time and a half at minimum wage.