Law of supply | Supply, demand, and market equilibrium | Microeconomics | Khan Academy
Summary
TLDRThe video script explores the law of supply using grapes as an example. It explains that, all else being equal, an increase in price leads to an increase in the quantity supplied, and vice versa. The presenter introduces a supply schedule, showing how different prices affect the production quantity. Scenarios range from $1 to $4 per pound, with production increasing from 1,000 to 2,750 pounds annually. A supply curve is then plotted, illustrating the direct relationship between price and quantity supplied, assuming other factors remain constant.
Takeaways
- 🍇 The law of supply states that, all else being equal, an increase in price leads to an increase in the quantity supplied, and vice versa.
- 📈 The supply schedule is a table that illustrates the relationship between price and the quantity supplied over a specific time period.
- 💰 The price per pound of grapes is used as an example to demonstrate how changes in price affect the quantity of grapes a farmer is willing to supply.
- 🔄 The term 'quantity supplied' is used to refer to a specific amount of grapes produced in response to a given price, as opposed to 'supply' which refers to the overall relationship.
- 📊 A supply curve is plotted with price on the vertical axis and quantity on the horizontal axis, showing the upward-sloping relationship between price and quantity supplied.
- 🏞️ Scenarios are used to illustrate different quantities supplied at various price points, such as 1,000 pounds at $1 per pound and 2,750 pounds at $4 per pound.
- 🌱 As the price of grapes increases, farmers are incentivized to use more land, work harder, and potentially convert other crops to grapes to increase production.
- 📉 The supply curve shows a minimum price at which farmers are willing to start producing grapes, indicating that there is a threshold for production to occur.
- ⚖️ The script emphasizes the importance of 'ceteris paribus' (all else being equal) in economic analysis, noting that changes in other factors can shift the supply curve.
- 🔮 Future discussions will explore how factors other than price, which are currently being held constant, can affect the supply curve and the quantity supplied at any given price.
Q & A
What is the law of supply?
-The law of supply states that, holding all else equal, as the price of a good increases, the quantity supplied of that good also increases, and vice versa.
Why is it important to distinguish between 'supply' and 'quantity supplied'?
-The distinction is important because 'supply' refers to the entire relationship between price and the quantity of a good that producers are willing to sell, while 'quantity supplied' refers to the specific amount producers are willing to sell at a given price.
What does the supply schedule represent?
-The supply schedule is a table that shows the relationship between the price of a good and the quantity supplied, assuming all other factors remain constant.
How does the speaker illustrate the concept of supply using grape farming?
-The speaker uses the example of grape farming to illustrate supply by showing how different prices per pound would affect the quantity of grapes a farmer would produce and sell.
What is the significance of the price per pound in the grape supply schedule?
-The price per pound in the grape supply schedule is significant because it determines the profitability of producing grapes, which in turn influences the quantity of grapes a farmer is willing to supply.
What factors might cause a change in the quantity supplied according to the script?
-According to the script, changes in the price of grapes would cause a change in the quantity supplied, as higher prices incentivize more production and lower prices lead to less production.
How does the speaker represent the supply curve graphically?
-The speaker represents the supply curve graphically by plotting points on a graph with the price per pound on the vertical axis and the quantity produced (in thousands of pounds) on the horizontal axis, then connecting these points to form the curve.
What is the convention for placing price on the vertical axis in economics, as mentioned in the script?
-In economics, it is a convention to place price on the vertical axis, even though it is often considered the independent variable, which is typically placed on the horizontal axis in math and science.
What does the speaker imply about the minimum price needed to start producing grapes?
-The speaker implies that there is a minimum price at which grape farmers would be willing to start producing grapes, below which they would not find it profitable to supply grapes at all.
What does the speaker suggest will be discussed in the next few videos?
-The speaker suggests that in the next few videos, they will discuss the factors that have been held constant in the supply discussion and how changes in these factors can affect the supply curve.
Outlines
🍇 Introduction to the Law of Supply
The paragraph introduces the concept of supply using grapes as an example. It explains the law of supply, which states that if all other factors remain constant, an increase in price leads to an increase in the quantity supplied, and vice versa. The paragraph emphasizes the importance of distinguishing between 'supply' and 'quantity supplied,' similar to the distinction between 'demand' and 'quantity demanded.' A supply schedule is presented, showing how different prices per pound of grapes affect the quantity of grapes a grape farmer is willing to produce over a year. Scenarios are provided with quantities of 1,000 pounds at $1 per pound, 2,000 pounds at $2 per pound, and 2,500 pounds at $3 per pound, illustrating the direct relationship between price and quantity supplied.
📈 Visualizing the Supply Curve
This paragraph discusses the graphical representation of the supply curve, with price on the vertical axis and quantity produced on the horizontal axis. The speaker plots specific points based on the supply schedule from the previous paragraph, showing how the quantity supplied increases with the price. The points represent different scenarios at prices of $1, $2, $3, and $4 per pound, with corresponding quantities of 1,000, 2,000, 2,500, and 2,750 pounds, respectively. The paragraph also touches on the economic convention of placing price on the vertical axis, despite it being the independent variable. The supply curve is described as starting from a minimum price that initiates production, and the speaker anticipates discussing other factors that could shift the supply curve in future videos.
Mindmap
Keywords
💡Supply
💡Law of Supply
💡Quantity Supplied
💡Price
💡Grape Supply Schedule
💡Price per Pound
💡Supply Curve
💡All Else Equal
💡Independent Variable
💡Minimum Price
💡Economic Convention
Highlights
Introduction to the law of supply using grapes as an example.
The law of supply states that quantity supplied increases with price, holding all else equal.
Differentiation between 'supply' and 'quantity supplied' similar to 'demand' and 'quantity demanded'.
Explanation of the importance of specifying a time period for supply and demand schedules.
Construction of a grape supply schedule to illustrate the price-quantity relationship.
Scenario A: At a price of $1 per pound, 1,000 pounds of grapes are produced.
Scenario B: At a price of $2 per pound, production increases to 2,000 pounds.
Scenario C: At a price of $3 per pound, production further increases to 2,500 pounds.
Scenario D: At a price of $4 per pound, production reaches 2,750 pounds.
Graphical representation of the supply curve with price on the vertical axis and quantity on the horizontal axis.
Plotting specific points on the supply curve corresponding to different price levels.
The supply curve's upward slope indicates the direct relationship between price and quantity supplied.
Discussion of the minimum price needed to initiate production of grapes.
Differentiation between moving along the supply curve versus shifts in the supply curve due to factors other than price.
Anticipation of future videos discussing factors affecting supply other than price.
Transcripts
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 cheap 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.
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