Overview
This lecture explains the supply curve, its relationship with price, and why it slopes upward, using oil as the key example.
The Supply Curve
- A supply curve shows how much of a good suppliers are willing and able to sell at various prices.
- Each good or service has its own supply curve.
- As the price of a good increases, the quantity supplied generally increases.
Example: Oil Supply Curve
- At $5 per barrel, 10 million barrels of oil are supplied daily.
- At $20 per barrel, 25 million barrels are supplied daily.
- At $55 per barrel, 50 million barrels are supplied daily.
Why the Supply Curve Slopes Upward
- Different sources of oil have different extraction costs; cheaper sources supply first.
- Saudi Arabia can extract oil for $2 per barrel, while extraction in Alaska can cost at least $10 per barrel.
- Deepwater rigs like the Atlantis are the most expensive sources.
- Higher prices make it profitable for suppliers with higher extraction costs to enter the market.
- The supply curve slopes upward because increasing quantity requires exploiting more costly sources.
Suppliers’ Market Entry and Exit
- Only low-cost suppliers operate when prices are low.
- As price rises, higher-cost suppliers join the market.
- Suppliers enter or exit the market based on profitability at current prices.
Key Terms & Definitions
- Supply Curve — A graph showing the quantity of a good suppliers are willing to sell at different prices.
- Quantity Supplied — The amount of a good suppliers are willing to sell at a specific price.
- Extraction Cost — The cost to obtain a resource (like oil) from the ground.
Action Items / Next Steps
- Review supply curve concepts and be ready for equilibrium in the next lecture.
- Try practice questions if available.