Source: Image of Supply Graph created by Kate Eskra
Hi. Welcome to Economics. This is Kate. This tutorial is on supply. As always, my key terms are in red and my examples are in green.
In this tutorial today, we'll be talking about the law of supply. I'll give you a supply schedule, and then we'll draw a supply graph from that schedule. We'll talk about why it is that a supply curve is upward sloping, and I'll give you a few examples where there's actually an exception to this rule. Finally, we'll talk about why a phrase called "ceteris paribus" is really important when we're talking about supply.
So what I need you to do for this tutorial is to think like a supplier or a producer of something. We're not talking about buying things here as a consumer. We're on the other side of it. We're thinking about producing something. So many of us are not business owners. So what I want you to think about is supplying your labor.
Here's an example for you. If your boss offered you minimum wage and said, "Oh, won't you working a bunch of overtime hours for me this weekend," how many hours would you supply? Now, what if he came back and said, "OK. OK. OK. I realize how valuable your time is. What if I give you $100 per hour?"
So if that was the case, would you be willing to supply more hours than if it was minimum wage? Most people, it turns out in our country, respond that way. If we get a higher wage, we are actually willing to supply more hours.
All right. So what supply is all about is, like I said, producing something. So you're able to produce something, but you're also willing to supply it at a given price.
Here's an example for you. Let's look at a farmer's willingness to supply apples. OK. So these are in terms of thousands of bushels. Obviously, no farmer is just farming 1, 2, 3, 4, 5, 6, or 7 apples. They're in thousands of bushels.
And if the price per apple was $2, that's a pretty expensive apple. Right? This farmer's actually willing to produce a whole lot-- 7,000 bushels up them.
Notice that, as the price falls, he is willing to supply less of them. And in fact, he's not willing to supply at all once they reach $0.25 per apple. At some point, this farmer is going to say, "You know what? I can't even afford to stay in business at this price. I'm out. I'm leaving the market at that price."
So here is a graph. If we look at the y-axis, the y-axis in economics here is going to be price. So in this case, it's price per apple. And here are the prices that I talked about in the supply schedule over here.
The x-axis is quantity. And as I said, in this case, we're talking our quantity of apples in thousands of bushels. Notice the relationship between price and quantity here.
As the price rises, the farmer is willing to supply more. As price falls, the farmer is willing to supply less. And these numbers I just charted from this supply schedule, so this point right here corresponds to this situation.
0 apples produced when they are $0.25 each. But as price goes up, he's willing to supply more. So this point is here. We're at $1. He supplying 3,000 bushels of apples.
So why is it that the supply curve is upward sloping? Well, hopefully, it makes sense to you that this farmer has some kind of cost structure. He can't just produce these apples for free. So in order to give him an incentive to work harder and produce more, they're going to have to raise the price that he receives for his product.
Just as on the previous slide, I gave you the example, if your boss is willing to pay you a much higher wage, you might be willing to supply more hours and give up your time more willingly if, in fact, the wage was worth it. It's the same situation here with the farmer of apples.
So that's what the law of supply tells us. It says that, if the price of a good decreases, the quantity of supply decreases. And vice versa is also the case. If the price of a good increases, the quantity of supply would increase.
Just note that we use the word "quantity" here. That's an important thing to notice. So we're trying quantity supply changing along with the price.
"Ceteris paribus" is an important phrase, and it means "holding all other variables constant." So what do we mean by that? Well, here, we're talking about the price of apples going up and down. So as the price fell, we could expect that farmers will produce fewer apples, again, because it's not as much worth their time and effort if they're not going to receive as high of a price. The ceteris paribus part of this is assuming that only the price of apples has changed. That will be the only reason that they're producing fewer apples.
So for example, the price of their resources did not change. So like, their fertilizer didn't get a lot more expensive or something. They didn't lose out on some kind of technology. Nothing else, relative to their production process, changed-- only the price. And that's what ceteris paribus does-- is it isolates the price as what we're looking at, not these external factors.
All right. So can there be any exceptions to the rule of supply increasing as price goes up or the quantity supply decreasing as price falls? So if the price of something ever went down, can you think of a time where you would actually supply more of it? So again, thinking about your labor.
If all of a sudden your wages or your salary was cut, most people in our country say, "You know what? If you cut my wages, I'm not going to work as much because it's not worth my time as much." But some of us need to work more just to make the same sort of income, so some of us actually would have to pick up a second job just to keep our incomes the same to pay our bills. If that's the case, if your wages are falling-- the price of your labor's falling-- yet you're supplying a greater quantity of hours, then, in fact, that would be a different relationship with your willingness to supply and the price of your labor.
Another exception to the rule can be where we have something called a "perfectly inelastic supply," and it's whenever there is a fixed amount of something. So here, in this case, I used the example of number of tickets to a concert or to a sporting event no matter how much crazy fans are willing to pay-- maybe they're willing to pay $500 for a ticket-- whoever's selling them can't actually produce or sell more because there is a fixed number of seats in the stadium. Here, I made that number 60,000. So regardless of the price, the supply is fixed at this quantity. OK.
So what did you learn about supply in this tutorial today? You learned that the law of supply describes the relationship between price and quantity. And in fact, there's usually a positive relationship between the two, and that gives us an upward sloping curve. So when price rises, the quantity supplied rises. And when price falls, the quantity supplied falls with it. Except, like I said, in some rare situations toward the end there.
Finally, you understand hopefully now that we hold everything else constant, except for price, when we're talking about a supply curve, and that's the concept of ceteris paribus. Thank you so much for listening. Have a great day.
Law of Supply
The positive relationship between price and quantity supplied; as price increases the quantity supplied increases.
Holding all other variables constant.