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Law of supply

In this video we explore the law of supply which states that quantity supplied increases as price increases. We use a supply schedule to describe the quantities a seller is willing to sell at different prices, and then translate the supply schedule into a supply curve that illustrates the law of supply. Created by Sal Khan.

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  • male robot hal style avatar for user BrentWassell
    So, if price goes up, the producer of a given product will want to make more of it so they can ideally make more money. Now, what about perishable goods? I mean, would a farmer make 100x more grapes just because price of them goes way up, knowing that he is going to have a SURPLUS?

    So, basically my question is wouldn't a SURPLUS for perishable goods NOT be good?
    (90 votes)
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    • piceratops ultimate style avatar for user A Highberg
      When we study the supply curve on its own, we are assuming that the demand is so high that it will buy up ALL of the supply, regardless of price. Obviously this is not usually the case in a real marketplace, but it is easier to see how supply and demand interact once we understand each one separately.
      (153 votes)
  • leaf green style avatar for user Mohammed Ibrahim
    As sal said if the price increases the supply would also increase but why would people buy things if the prices are high and moreover supply is also increasing.wouldnt the supplier get loss if he is suppying more when people are not willing to buy??
    (20 votes)
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    • sneak peak green style avatar for user Steven J. Hunt
      The cause and effect gets confusing here, I'll grant that. If overall demand for a product increases (i.e. the demand curve shifts right), THEN its price will increase at any given amount demanded. At this point there will be an incentive for suppliers to increase production (a movement along the supply curve, at the very least) because each marginal unit sold will achieve a greater revenue.

      Where it appears to have gotten confusing in your mind is that if there were merely movement along the demand curve, that is, if the price of a product were artificially changed as a result of some kind of policy rather than a genuine increase in public interest, then it wouldn't always be possible to gain greater revenues. This depends on the elasticity of the product's demand. For example, healthcare is an essential service, so if prices were artificially raised for healthcare, healthcare providers would be able to comfortably increase their provision without experiencing the deadweight loss that you're describing. As you will see when you study monopolies, this fact can be exploited for the profit of the supplier, which is why monopolies are so carefully regulated.

      Even the introductory theory here can get complicated if you think about it for a while, but the very basic statement that the law of supply makes is:

      "When the price of a given good is higher, there is more incentive to produce more of it."

      That is, the slope of the supply curve is positive, where the y-axis is price and the x-axis is amount produced or sold in a perfect world. The law of supply doesn't make any comment on the amount demanded. Indeed, if the amount of product created outstrips the amount demanded, the firm's marginal revenues will decrease and they will be forced to scale back their supply until they reach market equilibrium.
      (37 votes)
  • piceratops ultimate style avatar for user Girl on Fire
    So, we are kind of assuming that we have a monopoly on grapes, right? Because if we were selling the grapes at $4 a pound, and farmer Joe across the road is selling grapes at $3 a pound, every one would just buy from Joe, right? So in that situation what would happen to the supply curve?
    (16 votes)
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    • piceratops ultimate style avatar for user A Highberg
      In this case, we are not actually talking about a real marketplace at all, but instead a metaphoric black hole that dispenses a fixed amount of money for as much supply as you can throw in. In this case, there is no idea of monopoly or customer choice; only a single-minded drive to create as much supply as will make a profit. In this situation, the point at which it will cost more to make an additional unit of supply than the dispenser will provide is the point on the supply curve for a given price.
      (27 votes)
  • purple pi purple style avatar for user Adam Staples
    Are there cases where the supply increases but the quantity supplied decreases or vice versa?
    (12 votes)
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  • leaf blue style avatar for user florencia
    i also think that when the price is high, then the supplier will supply less as it's expensive and no one will buy it. Why does the quantity supplied increase as the price goes up? i honestly didn't understand
    (11 votes)
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    • leafers ultimate style avatar for user Caitlin Fischer
      When price rises, producers will supply more: the higher price that they can receive for their goods makes them have the incentive to buy more.
      While consumers will buy less of it, we don't consider this as a factor in the suppliers decision.
      We end up reaching a balanced equilibrium price in the end as a result of the buyers and sellers interacting.
      (11 votes)
  • leaf green style avatar for user Kris Kalavantavanich
    Hmmm... Shouldn't at a low price the supplier/seller wants to sell more, to compensate for the money the supplier/seller would gain at a higher price?
    (5 votes)
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    • blobby green style avatar for user robinlinacre
      It's better to think of the supply curve as the total amount supplied by many different firms. Some firms are better than others at producing the product. That means that at a low price, only the very efficient firms can produce and still make a profit. At a higher price, some other, less efficient firms are now also able to make a profit so enter the market.

      At the level of the single firm, it is also possible to counter your intuition. In particular, if the price in the market is less than the cost of production, a firm will produce zero. So as the price goes down, eventually there must be some price where the firm produces zero.
      (11 votes)
  • male robot donald style avatar for user Jack
    Hi i need some help from someone to explain to me why the supply curve goes up?
    and im merely repeating "Greg K's" question as i my self am having trouble with this?
    Sal keeps on saying in this video and the future ones (in micro economics) that for the supplier the more he supplies the more he want PER PIECE. my porblem with this is that the i would think that the more he supplies the LESS hes willing to make PER PIECE. (because overall he would be making tons more money). can someone please help?
    (5 votes)
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    • starky ultimate style avatar for user Geoff Ball
      Let's say the price for cherries is $2/pound.

      I might be willing to produce 500 pounds at that price (the rest of my fields will be used toward other fruits). Joe down the street is willing to produce 1000 pounds. You're not willing to produce any (you're using all your fields for other fruits). At a price of $2, quantity supplied is 1500 pounds.

      Now the price is $3/pound.

      I will use all my fields for cherries, producing 1000 pounds. Joe goes beyond that, buying more land to produce 1500 pounds of cherries. You will produce 500 pounds, but still want to use the rest of your land for other fruits. At a price of $3, quantity supplied is 3000 pounds.

      Now the price is $4/pound.

      I produce 1000 pounds. Joe buys even more land, producing 2000 pounds. You now use all your land, producing 1000 pounds. At a price of $4, quantity supplied is 4000 pounds.

      As price increases, firms are more attracted to produce that good. By definition, they are less attracted to produce other goods.
      (13 votes)
  • male robot hal style avatar for user Avi
    At Can someone explain, Why my thinking is wrong. Sal said, "I will stop planting other crops and do just grapes because grape prices are so high" If every farmer is going to do that then there would be enough supply in the market and wouldn't the price go down?
    (7 votes)
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    • starky sapling style avatar for user coloneljones1981
      You have hit on the constant problem that farmers face. The future prices are what is predicted. Meaning, if every farmer acts in their own self-interest, and plants that crops that are expected to fetch the most money at harvest time, than supply will absolutely go up; therefore, limiting the amount that they will get paid for them due to increased supply.

      It is very hard for people to understand this, but when I see what the prices will be in six months with the crops I supply, I try and pick a middle of the road crop for the exact reason that most people won't plant them and therefore my price will stay fairly close to what was predicted.
      (3 votes)
  • piceratops seedling style avatar for user chitranshu9jan
    why would quantity supply will increase if price will increase?
    (4 votes)
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    • hopper happy style avatar for user Jtq
      when price increases, business owners see that they can make more of the profit by putting those items on the market, so they make more of the item. For example, when the demand for paper rises, it causes the price to go up. Businesses see that with a higher price, they can make more profit, so they are more willing to make paper and put them on store shelves, hoping to maximize profit
      (8 votes)
  • male robot donald style avatar for user Dhwaj Singhal
    But suppose the price is at 4 dollars and im producing 3000lbs of grapes...in that case if the price went down to 2 dollars, ten wouldnt i produce like 6000lbs, to make up for the lost income?
    (3 votes)
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    • blobby green style avatar for user Surendra Singhi
      It is about incentivizing suppliers to produce more. The higher the price, the more suppliers are likely to work harder to produce an increased quantity, that is all. In India, for instance the Government sets a minimum support price for various food items, to incentivize production and increase supply.
      (3 votes)

Video transcript

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.