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  • 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 of 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,

  • that 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, OK, 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 price of my cost--

  • or if the size of my costs goes up, at any given price point,

  • I'd want to produce less.

  • So if my price of inputs go up, my supply, the supply,

  • would go down.

  • So if this becomes, at this price point,

  • I'd make less money, so I would produce less

  • or maybe I would produce other things.

  • So 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 we have to put our-- 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, maybe I can do better with blueberries.

  • And I would allocate more of my land

  • to blueberries than to grapes.

  • And so once again, the price of related goods--

  • well, it depends which related goods--

  • but if the price of productive substitutes--

  • so price of other things I could produce,

  • other things I can produce.

  • If the price of other things I can produce goes up,

  • then my supply of grapes, once again, 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 just 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.

  • And this one is pretty common sense.

  • The more people they are supplying,

  • the higher the supply would be.

  • So if the number of suppliers goes up-- and now

  • you wouldn't imagine-- 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 suppliers 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 could 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 into some type of dark ages.

  • If we have technological improvements,

  • then that will also make the supply go up.

  • You can also think of 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.

  • Now let's go away from the grapes,

  • because grapes, they're perishable goods, they go bad.

  • It's not like you can save goods to use them later.

  • But if, let's say, you are an oil producer.

  • And oil is something 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.

  • If there's a change in expected future prices--

  • so if you go from neutral to expecting prices go up-- 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 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.

In the last video, we introduced ourselves to the law of supply.

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