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142 • MicroeconomicsBox 8-2Can the Supply Curve Have aDownward Slope?There are two important circumstances in which the supply curve canhave a downward slope. The first is the case of increasing returns toscale. This occurs when a firm increases all inputs into production byX%, and output goes up by more than X%. However, microeconomic theoryassumes that in the short run, some factors of production are fixed,which means that one cannot change the productivity of those factors,at least not by much. For example, it may take several years to build anew factory. While the firm is using the old factory, the marginal outputfrom more workers or more raw materials is likely to be diminishing,leading to an upward-sloping supply curve. Over time, as new technologies(or new factories) change production systems, we frequently seedownward-sloping supply curves.The second case concerns the restoration of natural capital. As wewill discuss at greater length in Chapter 12, many natural resources exhibitecological thresholds. For example, some species may have a minimumviable population, and if the population falls below this level, itcan no longer reproduce itself. An ecosystem can exhibit similar behavior.For example, the Amazon is said to recycle its own rainfall. If enoughforest is cleared, it will no longer generate enough rainfall to sustain itself.Many critically important species and ecosystems have probablyfallen below their minimal viable population or stock, but it may still bepossible (and necessary, in many cases) to maintain or increase thestock through human intervention. The farther below the ecologicalthreshold the stock falls, the more difficult and expensive it may be topreserve or restore it. Once we have re-crossed the threshold, the systemis again capable of reproducing itself with no human intervention.In other words, the greater the supply, the cheaper it is to increase supplyeven further. This dynamic is limited, however. As we restore moreand more natural capital, we must give up more important opportunities,including the forgone opportunity of harvesting the resource andusing the land for other purposes. This opportunity cost is likely to riseas restoration displaces more and more valuable alternative uses.We could do exactly the same analysis with the market for good y, andwe would end up with similar supply and demand curves and a similarequation:MUyn/Mumn = Py = Pa/MPPayIf we divide each term in the x-market equation by each term in the y-market equation, we again arrive at the basic market equation previouslyderived. The terms for the marginal utility of money and the price of factora cancel out, and we have again the basic market equation: