Question

A. In the competitive model, the short-run supply curve of a firm is its marginal cost curve (above minimum average variable cost) and the market supply curve is the horizontal summation of those marginal cost curves across all firms. Since marginal cost curves are upward-sloping, short-run supply curves must also be upward-sloping. Why – what is it that causes marginal cost curves to be upward-sloping in the short-run? (6)

Answer 1

Answer : In short run time period some inputs are variable let labour is a variable input of short run. In this case there exists law of diminishing marginal returns to inputs. This means if the firm increase output level by one unit and include more inputs like labour to produce this extra one unit level of output then the firm has to pay the wages to additional labours . Therefore, the firm's cost increase for additional production and hence the marginal cost curve is upward sloping in short run time period.