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

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.

About James Carlton

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53 thoughts on “Law of supply | Supply, demand, and market equilibrium | Microeconomics | Khan Academy

  1. Thank you, Sal, for making Economics so much easier! 🙂 I am actually enjoying my holiday just doing math, physics, and economics! 😀

  2. @pseudonominous Don't talk about things you know nothing about. The importance and feasibility of Mars colonisation has been realised since the 70's.

  3. @RagingBubuli Such a short minded view to think that we will never leave the cradle that is the earth and push into the infinite of the universe.

  4. pretty naive law, I guess it's why you call it intuitive. There so many parameters that can nullify it, I don't think it can be justifying called a 'LAW'

    You can say 'as price rise, producer are willing to produce more" ..willing, that's it. nothing in there guarantee that they CAN..

  5. I think the easiest way of learning this would be that Demand is from the POV of the CONSUMERS whereas Supply is from the POV of the PRODUCERS. Producers are profit-oriented and therefore would wanna increase their prices with the increase in demand.

  6. @Menegoth Its youtube why the fuck are you arguing about mars colonization, the man is talking about grapes. Who cares how the grape market will fair in a martian economy?

  7. @Menegoth Unless ofc, im telling people not to talk about telling people what to talk about. Thanks for the advice internet manners police, sorry for the trouble officer.

  8. @TheGyij2 according to Adam Smith, price will be the sum of wages, profits and wages. and the minimal values to these will be the minimum quantity necessary for the subsistance of the worker, the capitalist, and the landowner. but he's somewhat wrong in this point, because he doesn't distinguish profit from interest, as Eugen Ritter von Böhm-Bawerk did later.

  9. @TheGyij2 actually, there is no minimum price, because price will be determined by the supply and demand, and both will also be determined by the price that will act as an incentive to produce or not a certain good.

  10. I'm not even going to lie

    I just made a file on my Ipad strictly for your videos.

    I don't watch tv. I watch your videos :p

  11. Find the answer in the short film “Mankinder (Occupying Chairlifts)”! A guy working in the white house calls on an underachieving old college buddy, to solve the economy from it’s debt and unemployment troubles. A couple brief conversations with the reluctant skibum corrects the course of humanity’s future. A simple rule tweak on inheritance ends up changing the direction and purpose of modern human life! Watch “Mankinder (Occupying Chairlifts)” on youtube.

  12. Screw the facts.
    If Khan says 1000lbs, then we shall produce at 1000lbs.
    Even if it can result in a great enough shortage to cause the market to crash.

  13. The supply curve is a graph of marginal cost, the minimum price for a supplier is the one where the company works as efficiently as possible.
    The supply curve can actually have inflection points because of economies of scale.
    For example the marginal cost to produce 1000 grapes is less than the marginal cost of producing 1 grape. That's because fixed costs like land and tractors can be spread over more units.
    Note the equalibrium price is still always where the supply and demand curves cross.

  14. Quick question. So when he sets a price for each quantity, what determines that price? What factors go into determining that price? Another instance is the price for barrels of oil. How do prices change for a good when the supplier isn't the one changing the price and only the amount quantity sold?

  15. Thank you so much for these videos. Always had been confused with economics, but now I'm starting to be really interested in it. Thank you again.

  16. Outstanding videos!
    Would you please guide me with following?
    Sometime is confusing when referring to price and input; I do understand that input is part of the cost of a particular item. Nonetheless, when referring to price, it is referring to input or selling price. There is any key point to make the difference?

  17. why did the quantity supply increase by price, if the price was increasing which mean that the quantity demanded would be decreased, why would they need to increase the quantity supply if there are now fewer people wanted to buy them?

  18. @Khan Academy my question is if the quantity of supply for a particular product which are generally in demand is low than the price of product should be high??

  19. You are helping a lot, but it would be more helpful if the videos are arranged in a chronological order. The playlist videos in an arranged order will also help your videos to get more watchers, as some of my friends are using other channels because of this reason, I thought to tell this to you.

  20. But why is curve of supply is not going up in steady war by going like a tree i.e why the supply is not increasing in same rate

  21. I think this is why I dislike a lot of economics, these so-called 'laws' are so tenuous when you take real life into account.

    I am an awful abstract-thinker though. Same thing with things like General Equilibrium, the heterodoxy schools of thought have a far better bearing of reality to me.

  22. $1 cost of what? to grow each pound of grapes? to buy it in the store? for business owners to buy and sell? which one?

  23. like the price of grapes in stores went up to two dollars so consumers pay more and businesses make more? or it's more expensive to make each pound? why would they make more if it's more expensive? if the price in stores goes up wouldn't demand go down?

  24. you're right sal about the price being on the vertical axis instead of the horizontal as an engineering student that tripped me up a little

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