Answer:
The direct relationship between the market price of a good and its quantity supplied is a fundamental concept in economics known as the law of supply. This relationship exists because suppliers are motivated by profit maximization and respond to changes in price signals.
There are a few key reasons why suppliers are willing and able to supply more of a good when its price increases:
Profit Incentive: Suppliers are driven by the desire to maximize their profits. When the price of a good increases, it creates a higher profit margin for suppliers. Higher prices mean that suppliers can cover their costs and earn more revenue per unit sold. This profit incentive encourages suppliers to increase their production and supply more of the good to the market.
Opportunity Cost: Suppliers face opportunity costs when allocating their resources. When the price of a good rises, it becomes relatively more profitable compared to other goods and services that suppliers could produce. Suppliers weigh the potential profits from supplying a particular good against the profits they could earn from alternative uses of their resources. If the price of a good increases, suppliers have a greater incentive to allocate more resources to its production and supply.
Production Capacity: Suppliers have limited production capacity and resources. Increasing the quantity supplied requires additional resources, such as labor, raw materials, and machinery. Suppliers are more likely to invest in expanding their production capacity if they anticipate higher prices, as it becomes economically viable to do so. When the price of a good increases, suppliers can justify the costs of increasing production and are willing to supply more to meet the higher demand at the prevailing price.
Marginal Cost: The law of supply is also influenced by the concept of marginal cost. As suppliers increase production, they may encounter diminishing marginal returns, meaning that the additional units produced require increasing costs. Therefore, suppliers expect to be compensated with higher prices to cover the additional costs associated with producing and supplying more units. The relationship between price and quantity supplied reflects the trade-off between the increasing marginal costs and the potential profits gained from higher prices.
In summary, the direct relationship between the market price of a good and its quantity supplied is driven by suppliers' profit-maximizing behavior, opportunity costs, production capacity considerations, and the concept of diminishing marginal returns. When the price of a good increases, suppliers are incentivized to supply more because it leads to higher profits, makes the good more attractive compared to alternative uses of resources, and covers the costs associated with expanding production.
Step-by-step explanation: