Law of supply | Supply, demand, and market equilibrium | Microeconomics | Khan Academy

Summary

The 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

00:00

🍇 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.

05:03

📈 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.

Keywords

💡Supply

Supply refers to the amount of a product that producers are willing and able to offer for sale at various prices during a given period. In the video, the concept is introduced through the example of grape farming, where the speaker explains how an increase in price per pound of grapes would lead to an increase in the quantity supplied, as farmers would be incentivized to produce more grapes.

💡Law of Supply

The law of supply is an economic principle stating that there is a direct relationship between the price of a good and the quantity supplied. As the price increases, producers are willing to supply more, and as the price decreases, producers are willing to supply less, all else being equal. The video script uses the analogy of grape farming to illustrate this law, explaining that higher prices lead to an increase in the quantity of grapes supplied.

💡Quantity Supplied

Quantity supplied is the specific amount of a product that producers are willing to offer for sale at a given price. The video script emphasizes the importance of distinguishing between 'supply' and 'quantity supplied'. It uses the example of grape farmers deciding to produce 1,000 pounds at a price of $1 per pound, illustrating how the quantity supplied changes with the price.

💡Price

Price is the amount of money required to purchase a specific good or service. In the context of the video, price is the independent variable that influences the quantity supplied. The script explains how grape farmers would adjust the quantity of grapes they are willing to supply based on the price per pound, with higher prices leading to greater production.

💡Grape Supply Schedule

A grape supply schedule is a table that shows the relationship between the price of grapes and the quantity supplied by grape farmers. The video uses this schedule to demonstrate how different prices per pound correspond to different quantities of grapes that farmers would be willing to produce and sell.

💡Price per Pound

Price per pound refers to the cost of a product divided by its weight, in this case, the cost for each pound of grapes. The video script uses this term to discuss how changes in the price per pound of grapes affect the quantity supplied by grape farmers, with higher prices encouraging more production.

💡Supply Curve

A supply curve is a graphical representation that shows the relationship between the price of a good and the quantity of the good that producers are willing to supply. In the video, the supply curve is drawn to illustrate how the quantity of grapes supplied increases as the price per pound increases, reflecting the law of supply.

💡All Else Equal

The phrase 'all else equal' or 'ceteris paribus' is used in economics to hold constant all variables other than the one being studied. In the video, this concept is used to isolate the effect of price on the quantity supplied, assuming no other factors change.

💡Independent Variable

In the context of the video, the independent variable refers to the factor that can change and affect other variables in the model. Price is described as the independent variable because it is the factor that, when changed, influences the quantity supplied, which is the dependent variable.

💡Minimum Price

The minimum price is the lowest price at which producers are willing to supply a product. The video script suggests that there is a certain minimum price per pound that grape farmers need to receive before they are willing to start producing grapes, indicating the floor for supply.

💡Economic Convention

Economic convention refers to the standard practices or norms within the field of economics. The video mentions the convention of placing price on the vertical axis in supply and demand graphs, even though it might not align with conventions in other scientific disciplines where the independent variable is typically on the horizontal axis.

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.