Why does a typical demand curve slope downward?
When price fall the quantity demanded of a commodity rises and vice versa, other things remaining the same. It is due to this law of demand that demand curve slopes downward to the right. In other words, as a result of the fall in the price of the commodity, consumer's real income or purchasing power increases.
Firms need to sell their extra output at a higher price so that they can pay the higher marginal cost of production. Hence, decisions to supply are largely determined by the marginal cost of production. The supply curve slopes upward, reflecting the higher price needed to cover the higher marginal cost of production.
- In a decreasing cost industry, the long run supply curve is downward sloping since as output increases and new firms enter, production costs decline. The computer industry is an example of a downward sloping supply curve, since as the number of computers produced increased, the price of inputs, such as chips, decline.
- Price and quantity supplied have a direct relationship. What do points on a market supply curve represent? Each point represents the quantity supplied by all producers in a market at a given price. The manufacturer would be willing to supply more games to the market.
- A change in the price of a good or service, holding all else constant, will result in a movement along the supply curve. A change in the cost of an input will impact the cost of producing a good and will result in a shift in supply; supply will shift outward if costs decrease and will shift inward if they increase.
The supply curve slopes upward, reflecting the higher price needed to cover the higher marginal cost of production. The higher marginal cost arises because of diminishing marginal returns to the variable factors.
- Slope. If a line has positive slope, then the y-coordinate increases as the x-coordinate increases, so the line "slopes upward." If a line has negative slope, then the y-coordinate decreases as the x-coordinate increases, so the line "slopes downward."
- The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.
- Supply curve shift: Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price. The ceteris paribus assumption: Supply curves relate prices and quantities supplied assuming no other factors change.
Updated: 2nd October 2019