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