The upward slope of the supply curve can be explained as:
(i) Price level determines the number of profits: Higher the price, larger is the profit that can be earned, ceteris paribus. This gives producers’ incentives to produce more and offer for sale, that is, supply in the market.
(ii) The marginal cost of production: It increases because of the law of diminishing returns, that is, increasing cost with an increase in production. Hence, the producer will be prepared to produce and supply more only at a higher price, so as to cover the higher cost of production.
(iii) An increasing cost industry: In the long run, higher prices may attract new firms in an industry. However, input costs may also increase. So, the new firms would be willing to supply more only at higher prices to cover higher costs of production. So, at higher prices, more firms produce well.
