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Introduction to the Law of Supply. Created by Sal Khan.
Video transcript
We've talked a lot about demand. So now let's talk about supply, and we'll use grapes as this example. We'll pretend to be grape farmers of some sort. So I will 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-- in the next few videos, we'll talk about what happens when we change some of those things that we're going to 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-- now, 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 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 talk 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 that 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 then let's put our Price over here. This will be in price per pound, the per pound price of grapes. And then 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? So if we didn't say per day, we don't know what we're really talking about. Quantity Supplied. And so let's just say Scenario A, if the price per pound of grapes is $0.50-- if it's $0.50 per pound-- actually, let me just do round numbers, but you get the idea. If 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 sheep land. So no one else wants to use that land for other things. It's only good for growing grapes. And so we will provide-- so this is price per pound. And in that situation, we can produce 1,000 pounds 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, 1,000 pounds. 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 want to maybe 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 are willing to produce 2,000 pounds. And we can keep going. The same dynamics keep happening. So let's say the price-- if the price were $3 per pound, now we do want to produce more. Maybe 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 have otherwise used for other crops. And so then I'm going to produce 2,500 pounds. And I'll do one more scenario. Let's say Scenario D, the price goes to $4 a pound. Same dynamic, I will stop planting other crops, use them now for grapes, because grape prices are so high. And so I will produce 2,750 pounds. And so we can draw a supply curve just like 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 the 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. So then this is really Price per pound. And then in the horizontal axis, Quantity Produced, or-- let me just write it. Quantity Produced, I'll say in the next year. We're assuming all of this is for the next year, so next year. And it's in thousands of pounds, so I'll put it in thousands of pounds. And so let's see, we go all the way from 1,000 to close to 3,000. So let's say this is 1,000, that's 1 for 1,000, that's 2,000, and that is 3,000. And then 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 1,000 pounds, at $1, 1,000 pounds. That's Scenario A. At $2, we would supply 2,000 pounds, $2, we'd supply 2,000 pounds. That's scenario B. At $3, we'd supply 2,500 pounds, $3-- oh, sorry. Now, when we look up-- See, now notice, I get my axes confused. This is Price. This isn't, when we talk about it this way, that we're viewing the thing that's changing. Although, you don't always have to do it that way. So at one $1, 1,000 pounds. $1, 1,000 pounds. $2, 2,000 pounds. $2, 2,000 pounds. $3-- this isn't $3, this is $3. $3, 2,500 pounds. So right about there. That's about 2,500. But I want to do it in that blue color, so we don't get confused. So $3, 2,500 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 close. So this is 2,500 pounds, gets us right over here. This is Scenario C. And then Scenario D at $4, 2,750. So 2,750 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 will 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's something-- that minimum price is over here, that just even gets 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 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.