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- Now that we've got the demand curve down, let's move on to the supply curve.
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A supply curve shows how much of a good suppliers are willing and able to supply
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at different prices. As with the demand curve, there's a supply curve for every
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good and service. And again the ideas are the same so let's look at the supply curve
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for oil. We see an intuitive relationship between price and the quantity supplied.
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As the price goes up, the quantity of oil that companies are willing to supply
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increases. In this example, in a low price, $5 per barrel, let's say 10 million
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barrels of oil are supplied per day. At $20 per barrel, 25 million barrels are
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supplied, and at $55 per barrel, 50 million barrels are supplied. So in
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general, a higher price means a greater quantity supplied. Let's go deeper and see
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why. Oil exists all over the world but it's not equally easy to extract. In some
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places like Saudi Arabia, it's really easy to get oil out of the ground. It's costs
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about $2 a barrel to extract. Oil in the U. S.like from Alaska is a lot deeper and
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getting out cost more, at least $10 per barrel. And producing oil from an oil rig
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like the Atlantis rig in the Gulf Coast is even more expensive. That rig has to
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descend more than a mile underwater before drilling even begins. When oil prices are
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relatively low the only suppliers that can turn a profit are those who can get to the
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oil cheaply, like Saudi Arabia. As the price goes up, other suppliers in Nigeria,
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Russia, and Alaska who have higher extraction costs starts to become
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profitable so they can enter the market. As the price gets higher, even the most
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expensive extraction techniques become profitable. The supply curve slopes upward
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because the only way the quantity of oil can be increased is to exploit higher and
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higher cost sources of oil. As the price of oil goes up, the depth of
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the oil wells goes down. With this simple line the supply curve summarizes the way
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suppliers respond to a change in price including how suppliers will enter and
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exit the market depending on the price. So far we've said things like if the price
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goes down, buyers will want to buy more or if the price rises suppliers will want to
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sell more. But we haven't said anything about how prices are determined. That's
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the subject for the next video, Equilibrium.
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If you want to test yourself, click Practice Questions or
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if you're ready to move on, just click Next Video.
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Subtitles by the Amara.org community