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.