Factors Affecting Supply

How the price of inputs, price of related goods, number of suppliers technology, and expected future prices affects the supply curve

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.