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 go 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 U. S.like from Alaska is a lot deeper and

getting 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 starts 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.

Subtitles by the Amara.org community