The Supply Curve

Suppliers of a good change how much they supply as the price changes. And a supply curve shows us how much suppliers are willing to supply at different prices. There’s a supply curve for every good and service out there (just like with the demand curve).

Let’s take a look a the classic economic example of oil. As the price of oil increases, the quantity of oil that suppliers (in this case, oil companies) are willing to supply also increases. It’s a pretty intuitive relationship.

But why is it the case that the higher the price, the more oil supplied?

Oil is a global product. You can find it – and it’s used – all over the world. However, ease of extraction is not so global. In some places, like Saudi Arabia, it's easy, and therefore cheap, to get oil out of the ground. But Alaska? Not so much. Extraction requires drilling deep in the earth and the cost can be eight times as high as it is in Saudi Arabia. Oil rigs off the Gulf Coast have even higher extraction costs. They have to drop a mile underwater just to begin drilling.

These varying extraction costs means that some suppliers can turn a profit even when the price of oil is relatively low. But many others cannot. However, when prices rise, it suddenly becomes profitable to drill in places like Alaska and the Gulf Coast.

Starting to make sense? The supply curve slopes upward because, to increase the quantity of oil supplied, companies have to use higher cost sources. The supply curve for oil summarizes how oil companies respond to changes in cost per barrel. But the idea is essentially the same no matter the good or service and its suppliers.

Now, you may be wondering, how are prices actually determined? That’s up next as we explore the Equilibrium Price and Quantity.