Law of supply Introduction to the Law of Supply
Law of supply
- We've talked a lot about demand
- So now let's talk about supply!
- And we'll use grapes for this example
- We'll pretend to be grape farmers of some sort
- So I'll start by introducing you
- (and maybe I'll do it in purple in honor of the grapes)
- to the law of supply which, like the law of demand,
- makes a lot of intuitive sense
- If we hold all else equal
- and in the next few videos
- we'll talk about what happens
- when we change some of those things
- that we'll hold equal right now
- but if you hold all else equal
- and the only thing that you're doing
- is you're changing price
- then the law of supply says
- that if the price goes up
- I'll just say p for price
- if the price goes up then the supply
- and let me be careful
- the quantity supplied goes up
- And then you can imagine
- if the price goes down
- the quantity supplied goes down
- And you might already notice that
- that I was careful to say quantity supplied
- And it's just like we saw with demand
- When we talk about demand going up or down
- we're talking about the entire price/quantity relationship shifting
- When we're talking about a particular quantity demanded
- we say quantity demanded
- we don't just say demand
- This is the exact same thing for supply
- When we're talking about a particular quantity
- we'll be careful to say quantity
- If we talk about supply increasing
- we're talking about the entire relationship shifting
- either up or down
- So let's just make sure this makes intuitive sense for us
- and I think it probably does.
- Let's think about ourselves as grape farmers
- and I'll make a little supply schedule right over here
- so grape supply schedule which is really just a table
- showing the relationship between, all else equal,
- the price and the quantity supplied
- So let's label some scenarios over here
- just like we did with the demand schedule
- Scenarios... and let's put our price over here
- and this'll be in price/lb the per pound price of grapes
- and this is the quantity produced over the time period
- and whenever we do any of these
- supply or demand schedules
- we're talking over a particular time period
- It could be per day.
- It could be per month.
- It could be per year.
- but that's the only way to make some sense of
- OK, what is the quantity per day going to be produced,
- if that's the price?
- We didn't say per day...
- We don't know what we're talking about.
- Quantity supplied...
- And so let's just say Scenario A
- If the price per pound of grapes is 50 cents
- if it's 50 cents per pound
- actually let me just do round numbers
- but you get the idea
- The price per pound is $1.
- Let's just say for us
- we consider that to be a relatively low price .
- And so we'll only kind of do the easiest land
- our most fertile land where it's easy to produce grapes
- and maybe the fertile and cheap land
- so no-one else wants to use the land for other things
- it's only good for growing grapes
- And so we will provide,
- --so this is price per pound--
- In that situation we can produce 1000 lbs in this year.
- And I've never been a grape farmer,
- so I actually don't know
- if that's a reasonable amount or not
- but I'll just go with it, 1000 lbs.
- Now, let's take Scenario B
- Let's say the price goes up to $2
- Well now not only would we produce
- what we were producing before,
- but we might now wanna buy some more land
- land that might have had other uses
- land that's maybe not as productive for grapes
- but we would because now we can get more for grapes
- and so maybe now we're willing to produce 2000 lbs.
- And we could keep going
- the same dynamics keep happening
- so let's say if the price were $3 per pound
- now we do want to produce more,
- maybe now we're even willing to work a little harder,
- or plant things closer to each other,
- or maybe I'll get even more land involved than
- I would've otherwise used for other crops
- and so then I'm gonna produce 2500 pounds
- And I'll do one more scenario.
- Let's say Scenario D.
- the price goes to $4 a pound
- Same dynamic, I'll stop planting other crops.
- And use them now for grapes
- because grape prices are so high
- and so I will produce 2750 pounds
- And so we can draw a supply curve
- just as we have drawn demand curves
- and it's the same exact convention
- which I'm not a fan of putting price on the vertical axis
- because as you see,
- we tend to talk about price as an independent variable.
- we don't always talk about it that way
- and in most of math and science
- you put the independent variable on the horizontal axis
- but the convention in economics is
- to put it on the vertical axis.
- So price on the vertical axis
- and so this is really price per pound
- And then on the horizontal axis quantity, produced.
- Let me just write quantity produced.
- I'll say in the next year
- we're assuming all of this is for the next year
- and it's in thousands of pounds
- so I'll put it in thousands of pounds.
- And so let's see we all the way from 1000 to close to 3000
- so this is 1000
- that's 1 for 1000 that's 2000 and that is 3000
- and the price goes all the way up to 4
- so it's 1 2 3 and then 4
- So we can just plot these points
- these are specific points on the supply curve.
- So at $1 we would supply 1000 pounds
- That's Scenario A.
- At $2 we would supply 2000 pounds.
- That's Scenario B.
- At $3 we would supply 2500 pounds.
- $3....I am sorry....
- See...notice I get my axes confused
- This is price.
- This isn't what when we talk about it this way
- that we're kind of viewing as the thing that's changing
- although you don't always have to be that way.
- So $1-1000 pounds, $2-2000 pounds,
- $3--not this, this isn't $3--this is $3--$3-2500 pounds.
- So I'll write about that.
- That's about 2500.
- I want to do it in that blue color
- so we don't get confused
- So $3-2500 pounds.
- That's about right.
- So this is Scenario C.
- And then Scenario D at $4
- Actually let me be a little bit clearer with that
- because we're getting a little close
- This is 2500 pounds gets us right over here.
- This is Scenario C.
- And then Scenario D at $4-2750
- So 2750 is like right over there
- So that is $4.
- That is Scenario D.
- And if we connect them,
- they should all be on our supply curve.
- So they will all be...
- it would look something like that.
- And there's some minimum price
- we would need to supply some grapes at all.
- We wouldn't give them away for free
- so maybe that minimum price is like over here.
- that just to even get started producing grapes
- So this right over here is
- what our supply curve would look like.
- Now remember the only thing we're varying here
- is the price.
- So if the price were to change all else equal
- we would move along this curve here.
- Now in the next few videos
- I'll talk about all of those other things
- we've been holding equal
- and what they would do,
- at any given price point, to this curve,
- or in general what they would do to the curve.
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