0:00:00.200,0:00:00.766 In the last video 0:00:00.766,0:00:02.438 we introduced ourselves 0:00:02.438,0:00:03.692 to the law of supply 0:00:03.692,0:00:05.968 and it was a fairly common sense idea 0:00:05.968,0:00:07.379 that if we hold all else equal, 0:00:07.379,0:00:10.147 that if the price of something goes up, 0:00:10.147,0:00:11.308 there's more incentive 0:00:11.308,0:00:13.119 for more producers to produce it, 0:00:13.119,0:00:14.933 or a given producer to produce more of it. 0:00:14.933,0:00:15.433 And we saw that. 0:00:15.433,0:00:17.461 As the price goes up, 0:00:17.461,0:00:19.621 we moved along the supply curve, 0:00:19.621,0:00:22.133 and the quantity produced went up. 0:00:22.133,0:00:23.164 Now what I want to talk about 0:00:23.164,0:00:24.189 in this video 0:00:24.189,0:00:25.797 is all the things we held equal 0:00:25.797,0:00:26.800 in the last video. 0:00:26.800,0:00:28.770 And the first of these, 0:00:28.770,0:00:29.700 I'll call this 0:00:29.700,0:00:32.615 the "price of inputs." 0:00:32.615,0:00:34.075 Or, another way to think about it 0:00:34.075,0:00:35.782 is the "cost of production." 0:00:35.782,0:00:37.965 So if the price of inputs, 0:00:37.965,0:00:39.729 maybe the price of labor, 0:00:39.729,0:00:40.677 the people who would have to 0:00:40.677,0:00:41.563 pick the grapes, 0:00:41.563,0:00:42.323 or our fuel 0:00:42.323,0:00:43.606 that we need to transport 0:00:43.606,0:00:45.012 the grapes, or the land, 0:00:45.012,0:00:46.605 if any of that increased, 0:00:46.605,0:00:48.460 then at a given price point, 0:00:48.460,0:00:49.435 we would make less money. 0:00:49.435,0:00:50.457 There's less incentive 0:00:50.457,0:00:51.386 for us to do it, 0:00:51.386,0:00:52.731 especially if this is true . 0:00:52.762,0:00:54.729 only for grapes 0:00:54.729,0:00:55.533 Maybe we'll say, 0:00:55.533,0:00:57.098 "Okay, if it's now more expensive 0:00:57.098,0:00:58.214 to get grape seeds, 0:00:58.214,0:01:00.116 maybe I'll start planting something else, 0:01:00.116,0:01:01.200 because I'm not getting 0:01:01.200,0:01:03.467 as much profit per pound of grape." 0:01:03.467,0:01:05.550 So if the price of my inputs, 0:01:05.550,0:01:10.333 or if the size of my costs go up, 0:01:10.333,0:01:11.587 at any given price point, 0:01:11.587,0:01:13.475 I'd want to produce less. 0:01:13.475,0:01:16.835 So if the price of inputs go up, 0:01:16.835,0:01:21.757 my supply would go down. 0:01:21.757,0:01:23.754 So, this becomes... 0:01:23.754,0:01:25.240 at this price point, 0:01:25.240,0:01:26.216 I'd make less money, 0:01:26.216,0:01:27.562 so I would produce less, 0:01:27.562,0:01:29.745 or maybe I would produce other things. 0:01:29.745,0:01:33.507 So I would shift the whole supply curve 0:01:33.507,0:01:37.222 would shift to the left. 0:01:37.222,0:01:39.219 And also, even the minimum price 0:01:39.219,0:01:40.798 I would need to supply any of it 0:01:40.798,0:01:41.587 would also go up 0:01:41.587,0:01:42.748 when you shift the curve to the left, 0:01:42.748,0:01:44.234 because now, all of a sudden, 0:01:44.234,0:01:45.785 it costs me more to produce 0:01:45.785,0:01:47.485 even that first unit. 0:01:47.485,0:01:50.829 And, likewise, if my price of my inputs went down, 0:01:50.829,0:01:52.176 now, all of a sudden, 0:01:52.176,0:01:53.244 at any given price point, 0:01:53.244,0:01:53.942 producing grapes 0:01:53.942,0:01:55.397 would become more profitable 0:01:55.397,0:01:56.587 and I would have more incentive 0:01:56.587,0:01:58.166 to maybe produce grapes 0:01:58.166,0:01:59.095 relative to other things 0:01:59.095,0:02:00.070 and use more land 0:02:00.070,0:02:02.160 for grapes than other things 0:02:02.160,0:02:03.710 and then you would have 0:02:03.710,0:02:05.922 the whole curve shift to the right. 0:02:05.922,0:02:10.785 Now let's think about related goods. 0:02:10.785,0:02:12.518 So what happens 0:02:12.518,0:02:14.476 with the price of related goods? 0:02:14.507,0:02:17.046 And when we think about this, 0:02:17.046,0:02:18.309 we don't want to think of it 0:02:18.324,0:02:19.840 from a demand point of view, 0:02:19.840,0:02:20.922 because we're talking about supply. 0:02:20.922,0:02:21.651 You want to think about it 0:02:21.651,0:02:22.797 from the producer's point of view 0:02:22.797,0:02:25.549 So when we think about related goods here, 0:02:25.549,0:02:26.600 we want to think about 0:02:26.600,0:02:27.794 substitutes for production. 0:02:27.794,0:02:29.235 So, maybe I'm a farmer, 0:02:29.235,0:02:31.232 and I know very little bit about farming, 0:02:31.232,0:02:32.006 so I don't even know 0:02:32.006,0:02:32.795 if this is possible, 0:02:32.795,0:02:33.879 but maybe on my land, 0:02:33.879,0:02:34.900 I'm saying, 0:02:34.900,0:02:36.572 "Well, some of my land is going to be for grapes, 0:02:36.572,0:02:39.498 and some of it is going to be for blueberries." 0:02:39.498,0:02:40.891 And so what would happen 0:02:40.891,0:02:43.910 if the price of a related good 0:02:43.910,0:02:45.000 -- in particular, blueberries -- 0:02:45.000,0:02:45.814 what would happen 0:02:45.814,0:02:48.925 if the price of blueberries went up? 0:02:48.925,0:02:52.176 Well, if the price of blueberries went up, 0:02:52.176,0:02:53.244 then I would say, 0:02:53.244,0:02:53.894 "Wow, you know, 0:02:53.894,0:02:55.289 maybe I can do better with blueberries," 0:02:55.289,0:02:56.299 and I would allocate 0:02:56.299,0:02:57.645 more of my land 0:02:57.645,0:02:59.235 to blueberries than to grapes. 0:02:59.235,0:03:00.582 And so, once again, 0:03:00.582,0:03:02.161 if the price of related goods... 0:03:02.161,0:03:04.749 well, it depends which related goods... 0:03:04.749,0:03:08.244 but if the price of productive substitutes, 0:03:08.244,0:03:16.541 so the price of other things I could produce... 0:03:16.541,0:03:17.841 if the price of other things 0:03:17.841,0:03:19.143 I can produce 0:03:19.143,0:03:22.731 goes up, 0:03:22.777,0:03:24.979 then my supply of grapes, once again, 0:03:24.979,0:03:26.588 my supply of grapes would go down. 0:03:26.588,0:03:28.263 And the important thing is 0:03:28.263,0:03:29.551 is in any of these circumstances, 0:03:29.597,0:03:31.235 literally just think it through. 0:03:31.235,0:03:31.816 Do not just look at 0:03:31.816,0:03:32.746 what I'm writing here 0:03:32.746,0:03:35.599 and try to memorize it in some way, shape, or form. 0:03:35.599,0:03:37.519 This is really just a way 0:03:37.519,0:03:38.595 to think about things. 0:03:38.595,0:03:40.187 "Hey, obviously, if I can make 0:03:40.187,0:03:41.870 more money off of blueberries, 0:03:41.870,0:03:42.970 now, all of a sudden, 0:03:42.970,0:03:44.084 I'm going to allocate more of my land 0:03:44.084,0:03:45.754 to blueberries than to grapes." 0:03:45.754,0:03:48.133 Supply of grapes will go down. 0:03:48.133,0:03:48.833 Now let's think about 0:03:48.833,0:03:53.825 what happens with the number of suppliers. 0:03:53.825,0:03:56.050 "Number of Suppliers." 0:03:56.050,0:03:57.888 And this one is... 0:03:57.888,0:03:59.200 this is pretty common sense: 0:03:59.200,0:04:00.763 the more people that are supplying, 0:04:00.763,0:04:03.467 the higher the supply would be. 0:04:03.467,0:04:06.248 So if the number of suppliers goes up... 0:04:06.248,0:04:08.668 and now, this is a curve, 0:04:08.668,0:04:09.924 maybe, for the aggregate supply. 0:04:09.924,0:04:11.733 So if the number of suppliers goes up, 0:04:11.733,0:04:14.235 then the aggregate supply would go up 0:04:14.235,0:04:15.907 at any given price point. 0:04:15.907,0:04:17.904 If the number of suplliers were to go down, 0:04:17.904,0:04:20.180 then the aggregate supply would go down 0:04:20.180,0:04:22.147 at any given price point. 0:04:22.147,0:04:23.800 So this one, hopefully, is somewhat obvious. 0:04:23.800,0:04:28.208 Then we can think about things like technology. 0:04:28.208,0:04:29.235 And, so, this is, just... 0:04:29.235,0:04:30.257 maybe there's some innovation, 0:04:30.257,0:04:32.579 some new type of seed that, 0:04:32.579,0:04:34.299 with the same amount of work, 0:04:34.299,0:04:35.739 the same amount of land, 0:04:35.739,0:04:37.502 can produce that many more grapes. 0:04:37.502,0:04:42.071 So if we have technological improvements, 0:04:42.071,0:04:43.818 (I'm assuming we're not going to go 0:04:43.818,0:04:44.839 in some type of dark ages) 0:04:44.839,0:04:47.670 if we have technological improvements, 0:04:47.670,0:04:53.802 that will also make the supply go up. 0:04:53.802,0:04:55.845 You can also think about it as: 0:04:55.845,0:04:56.979 it might make it cheaper to produce, 0:04:56.979,0:04:58.818 so it's kind of the same thing here. 0:04:58.818,0:04:59.839 The price of inputs might go down, 0:04:59.839,0:05:02.254 so that would make your supply go up. 0:05:02.254,0:05:02.990 Or, you could just say, 0:05:02.990,0:05:04.766 "Hey, look. There's just going to be more grapes 0:05:04.766,0:05:06.969 popping off of these new types of vines that we got 0:05:06.969,0:05:10.008 so we're just going to produce more grapes." 0:05:10.008,0:05:11.133 And then the last one I'll cover, 0:05:11.133,0:05:12.225 and it's a little bit strange 0:05:12.225,0:05:13.314 in the grape analogy, 0:05:13.314,0:05:16.366 is the "expected future prices." 0:05:16.418,0:05:22.777 So the expected future prices 0:05:22.777,0:05:23.954 -- price expectations. 0:05:23.954,0:05:26.200 And let's go away from the grapes, 0:05:26.200,0:05:28.133 because grapes are perishable goods, 0:05:28.133,0:05:29.200 they go bad. 0:05:29.200,0:05:31.038 It's not like you can save goods 0:05:31.038,0:05:33.250 to use them later. 0:05:33.250,0:05:35.598 But let's say you are an oil producer. 0:05:35.598,0:05:36.098 And oil is something that 0:05:36.098,0:05:39.081 you can store and you can use it later. 0:05:39.081,0:05:44.422 If you expected oil prices to be neutral today, 0:05:44.422,0:05:46.093 and then, tomorrow, 0:05:46.093,0:05:48.090 all of a sudden, you are sure that 0:05:48.090,0:05:51.109 oil prices are going to go up in the future, 0:05:51.109,0:05:52.781 you're sure that a year from now, 0:05:52.781,0:05:54.685 oil prices are just going to go through the roof, 0:05:54.685,0:05:55.600 what's your incentive? 0:05:55.600,0:05:57.100 Well, you should hoard all of your oil. 0:05:57.100,0:05:59.055 Do not sell it today, 0:05:59.055,0:06:01.094 and wait to sell it in the future, 0:06:01.094,0:06:02.200 if you're sure 0:06:02.200,0:06:03.133 that's what's going to happen. 0:06:03.133,0:06:04.400 So if you expect... 0:06:04.400,0:06:06.518 if there's a change .. 0:06:06.518,0:06:08.431 in expected future prices. 0:06:08.431,0:06:11.088 so, if you go from neutral 0:06:11.088,0:06:15.125 to expecting prices go up in the future, 0:06:15.125,0:06:17.864 then you're going to hoard your goods. 0:06:17.864,0:06:18.871 You can't hoard grapes, 0:06:18.871,0:06:20.306 because the grapes will just go bad. 0:06:20.306,0:06:20.960 You might be able to, 0:06:20.960,0:06:21.460 I don't know, 0:06:21.460,0:06:22.576 turn them into wine or something. 0:06:22.576,0:06:25.876 But if we're talking about something like oil, 0:06:25.876,0:06:26.376 you would say, 0:06:26.376,0:06:28.300 "Hey, why should I pump all of the fixed amount of oil 0:06:28.315,0:06:30.027 in the ground today 0:06:30.027,0:06:31.400 to sell it at today's lower prices. 0:06:31.400,0:06:35.190 I'm going to lower the supply today 0:06:35.190,0:06:37.038 so I can sell it in the future." 0:06:37.038,0:06:39.546 So if the expected future prices 0:06:39.546,0:06:43.342 go from "neutral" to... 0:06:43.342,0:06:45.351 you expect future prices to go up dramatically, 0:06:45.351,0:06:46.883 then current supply, 0:06:46.883,0:06:48.044 -- and that's.. 0:06:48.044,0:06:49.316 . I'm just going to emphasize 0:06:49.316,0:06:50.733 by writing the word "current" -- 0:06:50.733,0:06:53.436 current supply will go down 0:06:53.436,0:06:53.936 so you can hoard it 0:06:53.936,0:06:56.357 to sell it in the future.