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Factors affecting supply

Price changes the quantity supplied, but what might cause supply to increase even if price hasn't changed? In this video, we explore the determinants of supply: those factors that cause an entire supply curve to shift. Created by Sal Khan.

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  • female robot grace style avatar for user ChiefSohcahtoa
    At , Sal mentions "aggregate supply." What is aggregate supply?
    (40 votes)
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  • male robot donald style avatar for user Jonathascouto
    I dont understand why supply goes up if prices do. in my logic, the more you have a higher price, the less people will have money to buy, therefore they will buy less and there will no be need to supply.
    (23 votes)
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    • leafers ultimate style avatar for user Andris
      Pay attention not to view demand and supply as same things. The video is about supply, it does not say anything about demand. If the price goes up, for whatever reason, if the people have the money to buy a given good or service is a matter of demand.

      Lets imagine a situation, where the price goes up, no matter why. In that case, the suppliers will be willing to sell more at this price. Suppose that the price of a bar of chocolate is 1 dollars in the market at the moment. If the price went up to 10 dollars a bar, the supply would be higher, because everybody would be selling chocolate.

      Looking at it from the demand side, people are willing to buy less chocolate if the price is 10 dollars, but this fact has nothing to do with supply.
      The market price and the sold quantity, what we can observe in the market are the results of the interacitons of both demand and supply.
      (80 votes)
  • blobby green style avatar for user anavi_98
    Doesn't the producer only control the prices? I mean they decide what price to sell it at and that would be the price. So how can we sat that the prices go up so the supply increases? Does he mean that when the SUPPLIER/PRODUCER increases the price, supply increases?
    (6 votes)
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    • leafers ultimate style avatar for user Andris
      The producer does NOT control the prices. It is true that they decide for what price they are willing to sell a given product, but:
      - the producer would be foolish to offer his product below the market price, since this way he would lose income and profit
      - the producer cant sell his product above the market price, as nobody is going to buy his product if they can get the same good for a lower price
      This is why the producer is going to offer his product at the market price (of course this applies to a simplified economic model, where there is only one period, every product from a given type is identical, etc...)

      If you master only one idea in economics, let this be: the price and the sold quantity are determined by both the suppliers and the producers.
      (23 votes)
  • blobby green style avatar for user ImprobableDreams42
    I'm confused about where the mass production of sub-par goods (like some of the things you find in Walmart or the dollar store) comes in here. Before taking microeconomics, I was under the impression that the lower the price of a product is, the more of that product the producer needs to sell in order to make it worth their while (for example, some eBay sellers based in Asia sell hundreds of units of a very cheap product, when American based sellers sell many fewer units of the same, but higher quality, product). Am I missing something? Is this an anomaly? Can the law of supply explain this?
    Thanks soooo much!!
    (7 votes)
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    • sneak peak green style avatar for user Steven J. Hunt
      Yes. Even though the consumer price of the inferior versions of the goods is lower, it doesn't necessarily mean that more of them need to be sold to recoup the cost of production (and therefore turn a profit). In fact, many inferior goods cost exponentially less to produce than their superior competitors. In microeconomic theory, all that we assume about the preferences of the supplier is that they want to make a value profit in the market, usually as a proportion of their investment.

      One interesting thing you will find about markets is that producers will tend to diversify their products in order to capture a greater clientele. If the producers of the inferior products you're talking about tried to produce the same thing that the superior producers did, they would be in direct competition and might not even be able to make as much profit as either of them currently do, since they are effectively removing customers from the other. When one producer makes cheaper goods, they target those with lower incomes, and when one makes fancier goods, they target those with higher incomes. The theory of "inferior goods" describes the former and the theory of "Giffen goods" and factors affecting demand describes the latter.

      In your example, the "Asian" producers probably have less capacity to invest in capital to produce than the superior "American" producers, who are more established. In addition, there are tariffs and shipping costs that the "Asian" producers have to deal with. It would not be wise to try to compete on the same field as the Americans for the same clientele in America because it would be more expensive for every unit sold. Instead, they wisely produce inferior goods for cheaper to capture a different demographic, and everyone is happy.
      (12 votes)
  • mr pink red style avatar for user veekay1230
    We were talking about the change in the supply curve due to the expectations of future prices. As we are talking of oil and we come to know that the future oil prices are expected to increase then the oil producer would save the oil for later. At the same situation the consumers will demand more of oil from the producer as they know that the future prices are expected to increase. So at this point the consumer is demanding more while the producer want to save it for the future. Is this the point where Inflation steps in?
    (8 votes)
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    • leaf green style avatar for user Eli Miller
      It really doesn't have a lot to do with inflation and just more with the market price of the good. If you make the assumption that the consumers also believe that the price will increase then the demand would go up while the suppliers restrict the supply. This just makes the price of oil jump and doesn't really cause inflation because it's not changing the money supply.
      (8 votes)
  • leaf green style avatar for user Lim Shao Yi
    I wanna ask about the supply curve. Isn't it that if i did not supply any grapes the price/lbs would be zero? Why is there a minimum point on the y-axis (price/lbs)?
    (8 votes)
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  • blobby green style avatar for user Amy Noriko
    This may be a stupid question- what does it mean "at any pricepoint"? I get the general gist of it, but I'd like to know what the pricePOINT means exactly? Thanks!
    (6 votes)
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    • piceratops tree style avatar for user Jayden Tan
      No that's a great question! :)

      "Pricepoint" is just a fancy term economists use to say "what if the price was x."
      In the video by Sal when he says the term "pricepoint" he's just referring to the white line supply curve and the four different points: A, B, C and D.

      Notice how A, B, C and D all line up with a price on the y axis: 1, 2, 3 and 4 respectively. All Sal has done is imagined 4 different scenarios where the price is 1, 2, 3 and 4 (dollars). If the price in the real world is actually 3 dollars at market price then the equilibrium point would be "pricepoint" C.

      If the price goes up, you draw a new point left from each of those price points (let's just call them points to make it easier.) and draw the yellow curve through the new points.

      To sum it all up: When Sal says "at any pricepoint" he's just referring to the supply curve and the four points on the white line. Hope that helps! :)
      (8 votes)
  • piceratops tree style avatar for user Diogo
    When we talk about the expectation of future prices and say that X price will increase and so we should stock the merchandise to sell it a higher price later it got me confused. When we refer to offer we are talking about what we produce or what he deliver to the suppliers? Wouldnt our production increase if we knew it would sell for a higher price?
    (4 votes)
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  • blobby green style avatar for user Ariyanna  Owens
    At the beginning of the video, Sal said if the price of grapes went up there would be incentive for producers to start producing grapes. Wouldn't in turn that make the price of grapes go down since there's more grapes?
    (6 votes)
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  • blobby green style avatar for user empedokles
    5) Seems counterintuitive: If I expect the price of oil go up I should produce even more of it today in order to sell more in the future and not cut the supply.
    (4 votes)
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Video transcript

In the last video, we introduced ourselves to the law of supply. And it was a fairly common sense idea that if we hold all else equal, that if the price of something goes up, there's more incentive for more producers to produce it or a given producer to produce more of it. And we saw that. As the price goes up, we moved along the supply curve, and the quantity produced went up. Now what I want to talk about in this video is all of the things we held equal in the last video. And the first of these, I'll call this the price of inputs, or another way to think about it is the cost of production. So if the price of inputs, maybe the price of labor, the people who would have to pick the grapes, or our fuel that we need to transport the grapes, or the land, if any of that increased, that at a given price point, we would make less money. There's less incentive for us to do it, especially if this is true only for grapes. Maybe we'll say, OK, if it's now more expensive to get grape seeds, maybe I'll start planting something else, because I'm not getting as much profit per pound of grape. So if the price of my inputs, or if the price of my cost-- or if the size of my costs goes up, at any given price point, I'd want to produce less. So if my price of inputs go up, my supply, the supply, would go down. So if this becomes, at this price point, I'd make less money, so I would produce less or maybe I would produce other things. So the whole supply curve would shift to the left. And also even the minimum price I would need to supply any of it would also go up, when you shift the curve to the left, because now all of a sudden, it costs me more to produce even that first unit. And likewise, if my price of my inputs went down, now all of a sudden at any given price point, producing grapes would become more profitable and I would have more incentive to maybe produce grapes relative to other things and use more land for grapes than other things. And then you would have the whole curve shift to the right. Now let's think about related goods. So what happens with the price of related goods. And we have to put our-- when we think about this, we don't want to think of it from a demand point of view, because we're talking about supply. You want to think about it from the producer's point of view. So when we think about related goods here, we want to think about substitutes for production. So maybe I'm a farmer-- and I know very little bit about farming, so I don't even know if this is possible-- but maybe on my land, I'm saying, well, some of my land is going to be for grapes and some of it is going to be for blueberries. And so what would happen if the price of a related good, in particular blueberries, what would happen if the price of blueberries went up? Well, if the price of blueberries went up, then I would say, wow, maybe I can do better with blueberries. And I would allocate more of my land to blueberries than to grapes. And so once again, the price of related goods-- well, it depends which related goods-- but if the price of productive substitutes-- so price of other things I could produce, other things I can produce. If the price of other things I can produce goes up, then my supply of grapes, once again, would go down. And the important thing is, is in any of these circumstances-- literally, just think it through. Do not just look at what I'm writing here and just try to memorize it in some way, shape, or form. This is really just a way to think about things. Hey, obviously, if I can make more money off of blueberries now all of a sudden, I'm going to allocate more of my land to blueberries than to grapes. Supply of grapes will go down. Now, let's think about what happens with the number of suppliers. And this one is pretty common sense. The more people they are supplying, the higher the supply would be. So if the number of suppliers goes up-- and now you wouldn't imagine-- this is a curve maybe for the aggregate supply. So if the number of suppliers goes up, then the aggregate supply would go up at any given price point. If the number of suppliers were to go down, then the aggregate supply would go down at any given price point. So this one, hopefully, is somewhat obvious. Then we could think about things like technology. And so this is just maybe, there's some innovation, some new type of seed that with the same amount of work, the same amount of land, can produce that many more grapes. So if we have technological improvements-- I'm assuming we're not going to go into some type of dark ages. If we have technological improvements, then that will also make the supply go up. You can also think of it as it might make it cheaper to produce. So it's kind of the same thing here. The price of inputs might go down. So that would make your supply go up. Or you could just say, hey, look, there's just going to be more grapes popping off of these new types of vines that we got, so we're just going to produce more grapes. And then the last one, I'll cover-- and it's a little bit strange in the grape analogy-- is the expected future prices. So the expected future prices, price expectations. Now let's go away from the grapes, because grapes, they're perishable goods, they go bad. It's not like you can save goods to use them later. But if, let's say, you are an oil producer. And oil is something you can store and you can use it later. If you expected oil prices to be neutral today, and then tomorrow, all of a sudden, you are sure that oil prices are going to go up in the future-- you're sure that a year from now, oil prices are just going to go through the roof-- what's your incentive? Well, you should hoard all of your oil. Do not sell it today and wait to sell it in the future, if you're sure that's what's going to happen. If there's a change in expected future prices-- so if you go from neutral to expecting prices go up-- prices go up in the future, then you're going to hoard your goods. You can't hoard grapes, because the grapes will just go bad. You might be able to, I don't know, turn them into wine or something. But if we're talking about something like oil, you would say, hey, why should I pump all of the fixed amount of oil in the ground today to sell at today's lower prices? I'm going to lower the supply today, so I can sell it in the future. So if the expected future prices go from neutral to you expect future prices to go up dramatically, then current supply-- and that's, I'm just going to emphasize by writing the word current-- current supply will go down. So you can hoard it to sell it in the future.