Law of Supply

Introduction to the 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

Supply...

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.