Video Transcript: Law of Supply

Hello, welcome back. In this video, we're going to discuss the law of supply. The  law of supply is a fundamental principle of economic theory, which states that all  else equal, an increase in price results in an increase in quantity supplied. In  other words, there is a direct relationship between price and quantity. Quantities  respond in the same direction as price changes. Okay, the chart below depicts  the law of supply using a supply curve, which is always upward sloping. Notice  the demand curve was downward sloping, now the supply curve is upward  sloping. A, B, and C are points on the supply curve, as you can see in this  graph. Each point on the curve reflects a direct correlation between quantity  supplied and price. Okay, so at point A, the quantity supplied will be q and the  price will be p and so on. Okay, in this example, you'll be able to see that  because we're charting the supply, that quantity supplied is on the horizontal  axis, right? And now price will be on the vertical axis, as we measure supply, the law of supply is so intuitive that you may not even be aware of all the examples  around you. Right again, when college students learn computer engineering  jobs pay more than English professor jobs, the supply of students with majors in  computer engineering will increase. Why? Because they are able to make more  money, right? So, then there, the demand for those jobs will increase, right?  When consumers start paying more for cupcakes than for donuts, bakeries will  increase their output of cupcakes and reduce their output of donuts in order to  increase their profits. Why? Because cupcakes are more expensive. People are  buying more cupcakes at this elevated price point when they're not buying as  much donuts, so they're going to increase the output of their cupcakes, so that  they can make a greater profit, because people are buying more of the  cupcakes at a higher price point than they are the donuts. When your employer  pays time and a half for overtime, the number of hours you are willing to supply  for work increases. Why? Because we're going to get paid more money. There's  going to be a demand, a greater demand for the higher pay scale, right? So  now, whenever, whenever overtime is offered at the workplace, more and more  people will want to take advantage of the overtime pay, because it's more in  wages. The law of supply summarizes the effect price changes have on  producer behavior. For example, a business will make more video game  systems if the price of those systems increases. The opposite is true if the price  of a video game system decreases, right? So, if the demand for this video game system goes up, right, and it's at a singular price point, as that demand goes up, those companies will raise their price until demand equals supply, and you're at  equilibrium price, right? So the law of supply summarizes the effect price  changes have on the behavior, right? The company might supply a million  systems if the price is $200 each, but if the price increases to $300 they could  potentially supply 1.5 million systems. You see, how that works, because if  there's a high demand at $200 let's push the price up a little bit more to see how demand reacts with a higher price point, right? If people, and in this, in this 

scenario, at $300 for the system, you know they're going to go and put 1500 or  1.5 million systems onto the market, right, hoping to be able to sell those at a  higher price point and therefore increasing their profit margin. So we're going to  look at supply schedule like we did for demand, so let's look at the supply  schedule, right, for grapes. Okay, same thing, vertical axis, horizontal axis, so  quantity supplied. Notice supply on the bottom, and here is the demand okay, or  the price, okay, so 1000 pounds, 2000 pounds, 3000 pounds of grapes, okay,  this will be our scale, right? and remember our curve, our supply curve is going  to be upward sloping, okay, so we have a $1 price point, we have a $2 price  point, we have a $3 price point and a $4 price point, so let's plot these out.  Okay, so at $1 we can supply 1000 pounds of grapes, right? So at $1 1000  pounds a okay, is demanded right or supplied at $1 but as we increase the price, right, when hopes to sell more, we will then produce and sell 2000 pounds.  pounds of grapes. Now at $3 notice that sodium is a mesh a little bit, because  our price is getting a little too high, right? At 25 at $3 we'll produce and supply  2500 pounds, right? right, and at $4 we will produce 2750 so notice as the price  goes up in the market we will produce more supply in order to take advantage of the increase in prices, so as the market drives the price up, as a producer, as a  supplier, we're going to want to increase the amount or quantity supplied, so that we can take advantage or capture a greater profit margin as the price goes up,  we will produce more, but notice there's a diminishing return as the price gets  too high. Now, notice between one and two we produced 1000 more pounds,  right, but between two and three we only produced 500 more pounds, right, and  between three and four we only produced 250 more pounds. Okay, so, so, so  prices are sensitive to supply, right? And as the price continues to get too high,  our production will scale back and will slow down, because we don't want to be  caught having too much supply in the market, and that way it's too saturated,  and if there's too much supply, then prices will come down on an equilibrium  basis, and therefore we'll be losing out on the additional profit margin that we  could make had prices been in equilibrium.