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