In the last video
we introduced ourselves
to the law of supply
and it was a fairly common sense idea
that if we hold all else equal,
that if the price of something goes up,
there's more incentive
for more producers to produce it,
or a given producer to produce more of it.
And we saw that.
As the price goes up,
we moved along the supply curve,
and the quantity produced went up.
Now what I want to talk about
in this video
is all the things we held equal
in the last video.
And the first of these,
I'll call this
the "price of inputs."
Or, another way to think about it
is the "cost of production."
So if the price of inputs,
maybe the price of labor,
the people who would have to
pick the grapes,
or our fuel
that we need to transport
the grapes, or the land,
if any of that increased,
then at a given price point,
we would make less money.
There's less incentive
for us to do it,
especially if this is true .
only for grapes
Maybe we'll say,
"Okay, if it's now more expensive
to get grape seeds,
maybe I'll start planting something else,
because I'm not getting
as much profit per pound of grape."
So if the price of my inputs,
or if the size of my costs go up,
at any given price point,
I'd want to produce less.
So if the price of inputs go up,
my supply would go down.
So, this becomes...
at this price point,
I'd make less money,
so I would produce less,
or maybe I would produce other things.
So I would shift the whole supply curve
would shift to the left.
And also, even the minimum price
I would need to supply any of it
would also go up
when you shift the curve to the left,
because now, all of a sudden,
it costs me more to produce
even that first unit.
And, likewise, if my price of my inputs went down,
now, all of a sudden,
at any given price point,
producing grapes
would become more profitable
and I would have more incentive
to maybe produce grapes
relative to other things
and use more land
for grapes than other things
and then you would have
the whole curve shift to the right.
Now let's think about related goods.
So what happens
with the price of related goods?
And when we think about this,
we don't want to think of it
from a demand point of view,
because we're talking about supply.
You want to think about it
from the producer's point of view
So when we think about related goods here,
we want to think about
substitutes for production.
So, maybe I'm a farmer,
and I know very little bit about farming,
so I don't even know
if this is possible,
but maybe on my land,
I'm saying,
"Well, some of my land is going to be for grapes,
and some of it is going to be for blueberries."
And so what would happen
if the price of a related good
-- in particular, blueberries --
what would happen
if the price of blueberries went up?
Well, if the price of blueberries went up,
then I would say,
"Wow, you know,
maybe I can do better with blueberries,"
and I would allocate
more of my land
to blueberries than to grapes.
And so, once again,
if the price of related goods...
well, it depends which related goods...
but if the price of productive substitutes,
so the price of other things I could produce...
if the price of other things
I can produce
goes up,
then my supply of grapes, once again,
my supply of grapes would go down.
And the important thing is
is in any of these circumstances,
literally just think it through.
Do not just look at
what I'm writing here
and try to memorize it in some way, shape, or form.
This is really just a way
to think about things.
"Hey, obviously, if I can make
more money off of blueberries,
now, all of a sudden,
I'm going to allocate more of my land
to blueberries than to grapes."
Supply of grapes will go down.
Now let's think about
what happens with the number of suppliers.
"Number of Suppliers."
And this one is...
this is pretty common sense:
the more people that are supplying,
the higher the supply would be.
So if the number of suppliers goes up...
and now, this is a curve,
maybe, for the aggregate supply.
So if the number of suppliers goes up,
then the aggregate supply would go up
at any given price point.
If the number of suplliers were to go down,
then the aggregate supply would go down
at any given price point.
So this one, hopefully, is somewhat obvious.
Then we can think about things like technology.
And, so, this is, just...
maybe there's some innovation,
some new type of seed that,
with the same amount of work,
the same amount of land,
can produce that many more grapes.
So if we have technological improvements,
(I'm assuming we're not going to go
in some type of dark ages)
if we have technological improvements,
that will also make the supply go up.
You can also think about it as:
it might make it cheaper to produce,
so it's kind of the same thing here.
The price of inputs might go down,
so that would make your supply go up.
Or, you could just say,
"Hey, look. There's just going to be more grapes
popping off of these new types of vines that we got
so we're just going to produce more grapes."
And then the last one I'll cover,
and it's a little bit strange
in the grape analogy,
is the "expected future prices."
So the expected future prices
-- price expectations.
And let's go away from the grapes,
because grapes are perishable goods,
they go bad.
It's not like you can save goods
to use them later.
But let's say you are an oil producer.
And oil is something that
you can store and you can use it later.
If you expected oil prices to be neutral today,
and then, tomorrow,
all of a sudden, you are sure that
oil prices are going to go up in the future,
you're sure that a year from now,
oil prices are just going to go through the roof,
what's your incentive?
Well, you should hoard all of your oil.
Do not sell it today,
and wait to sell it in the future,
if you're sure
that's what's going to happen.
So if you expect...
if there's a change ..
in expected future prices.
so, if you go from neutral
to expecting prices go up in the future,
then you're going to hoard your goods.
You can't hoard grapes,
because the grapes will just go bad.
You might be able to,
I don't know,
turn them into wine or something.
But if we're talking about something like oil,
you would say,
"Hey, why should I pump all of the fixed amount of oil
in the ground today
to sell it at today's lower prices.
I'm going to lower the supply today
so I can sell it in the future."
So if the expected future prices
go from "neutral" to...
you expect future prices to go up dramatically,
then current supply,
-- and that's..
. I'm just going to emphasize
by writing the word "current" --
current supply will go down
so you can hoard it
to sell it in the future.