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Supply curves are usually non decreasing. For example in a electricity market, providing more capacity means turning on new production units with higher costs, see e.g. the following representation:

Supply Stack in Electricity Markets enter image description here

My question is, in what context would it make sense to have a non monotonic supply curve?

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I am not an expert in micro theory. This answer is based on my limited knowledge.

Usually you don't. If the supply curve is drawn by stacking all the units of supply according to their marginal cost, as what happened in your figure, then the supply curve is monotonic by definition.

However, while the same goes to demand curve, I have actually seen non-monotonic demand curve in Becker 1991. In that paper, Becker shows that you can have non-monotonic demand curve if there is social influence so that a consumer's demand depends on demands by other consumers.

In analogy, I conjecture that if there is some externality of production so that a firm's marginal cost depends on other counterparts to some degree, there might be non-monotonic supply curve. But I don't know such a paper. I expect some other experts could give a real example from the literature.

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In the context of labour supply. The Wikipedia page on it offers the following explanation:

As wages increase above the subsistence level [...], there are two considerations affecting a worker's choice of how many hours to work per unit of time [...]. The first is the substitution or incentive effect. With wages rising, the tradeoff between working an additional hour for pay and taking one extra hour of unpaid time changes in favor of working. Thus, more hours of labour-time will be offered at the higher wage than the lower one. The second and countervailing effect is that the hours worked at the old wage rate now all gain more income than before, creating an income effect, which encourages more leisure to be chosen because it is more affordable [...], eventually neutralising the substitution effect and causing the backward bend.

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  • $\begingroup$ @VARulle thanks for you answer. Would it be correct also to consider production in industries, for example, production marginal cost decreases with volume (i.e. volume discount), until a new production line must be turned on if the first on is saturated? $\endgroup$
    – DeepNet
    Mar 17, 2021 at 18:05
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    $\begingroup$ @1muflon1, yes, did so now. $\endgroup$
    – VARulle
    Mar 18, 2021 at 9:05
  • $\begingroup$ @DeepNet, in a decreasing cost industry the long-run supply curve will be downward sloped, if this is what you mean. $\endgroup$
    – VARulle
    Mar 18, 2021 at 9:24

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