The Supply Curve

{'type': u'plain'}

- 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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