Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Why do supply curves slope upward from left to right?

1. Producers want to supply more at lower prices

2. More quantities are supplied at higher prices

3. Consumer demand is less at higher prices

4. Production costs decrease at higher output

The correct answer is: More quantities are supplied at higher prices

The upward slope of supply curves from left to right indicates that as prices increase, producers are willing to supply more of a good or service. This relationship is primarily driven by the incentive structure underlying producer behavior. When the price of a good rises, it often becomes more profitable for producers to increase their output. Higher prices can offset higher production costs, thereby motivating suppliers to release more of the product into the market. In contrast, the notion that producers want to supply more at lower prices does not align with the fundamental principles of supply; rather, it suggests a disincentive for production. The idea that consumer demand decreases at higher prices, while reflecting demand dynamics, does not explain the supply behavior. Lastly, the assertion that production costs decrease at higher output generally relates to economies of scale but isn't the primary reason for the upward slope of the supply curve. It is the price incentive that clearly establishes why more quantities are supplied as prices rise, thus validating why the correct answer is rooted in the relationship between higher prices and increased supply.