The Supply Curve

{'type': u'plain'}

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- [Narrator] 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 delve 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 US, like from Alaska,
is a lot deeper

and getting it 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,

start 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.

If you want to test yourself,
click "Practice Questions."

Or if you're ready to move on,
just click "Next Video".

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