- Now that we've got the demand curve down, let's move on to the supply curve.
A supply curve shows how much of a good suppliers are willing and able to supply
at different prices. As with the demand curve, there's a supply curve for every
good and service. And again the ideas are the same so let's look at the supply curve
for oil. We see an intuitive relationship between price and the quantity supplied.
As the price goes up, the quantity of oil that companies are willing to supply
increases. In this example, in a low price, $5 per barrel, let's say 10 million
barrels of oil are supplied per day. At $20 per barrel, 25 million barrels are
supplied, and at $55 per barrel, 50 million barrels are supplied. So in
general, a higher price means a greater quantity supplied. Let's go deeper and see
why. Oil exists all over the world but it's not equally easy to extract. In some
places like Saudi Arabia, it's really easy to get oil out of the ground. It's costs
about $2 a barrel to extract. Oil in the U. S.like from Alaska is a lot deeper and
getting out cost more, at least $10 per barrel. And producing oil from an oil rig
like the Atlantis rig in the Gulf Coast is even more expensive. That rig has to
descend more than a mile underwater before drilling even begins. When oil prices are
relatively low the only suppliers that can turn a profit are those who can get to the
oil cheaply, like Saudi Arabia. As the price goes up, other suppliers in Nigeria,
Russia, and Alaska who have higher extraction costs starts to become
profitable so they can enter the market. As the price gets higher, even the most
expensive extraction techniques become profitable. The supply curve slopes upward
because the only way the quantity of oil can be increased is to exploit higher and
higher cost sources of oil. As the price of oil goes up, the depth of
the oil wells goes down. With this simple line the supply curve summarizes the way
suppliers respond to a change in price including how suppliers will enter and
exit the market depending on the price. So far we've said things like if the price
goes down, buyers will want to buy more or if the price rises suppliers will want to
sell more. But we haven't said anything about how prices are determined. That's
the subject for the next video, Equilibrium.
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