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- Today we turn to look at the supply[br]curve. I'm going to move

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through this material a[br]little bit more quickly than

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through demand because[br]many of the ideas are similar.

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The supply curve represents the[br]behavior of sellers and the supply curve

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is a function that shows the quantity[br]supplied at different prices. The quantity

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supplied is the quantity that producers[br]are willing and able to sell at a

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particular price. Okay, here comes our[br]supply curve just as before.

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horizontal reading tells us the quantity[br]supplied at each price,

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in other words how much[br]suppliers are willing and

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able to sell at each price.[br]At a price of $20 per barrel

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suppliers are willing and able to[br]sell 30 million barrels of oil per day.

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The vertical reading tells us the minimum[br]price which suppliers will sell a given

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quantity. For example for the 50th[br]millionth barrel of oil suppliers are

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willing and able to sell that barrel of[br]oil for $55. Once again the vertical

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reading tells us the minimum price at[br]which suppliers will sell a given

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quantity. As before, sometimes the[br]horizontal reading is a little bit easier

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to understand some problems, other times[br]the vertical reading is a little bit

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easier. So it's important that you be[br]comfortable reading the supply curve in

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both ways. Producer surplus is just the[br]producers version of consumer surplus.

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Remember, consumer surplus is the[br]consumers gain from exchange, so producer

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surplus is the producers gain from[br]exchange. It's the difference between the

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market price and the minimum price at[br]which producers would be

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willing to sell a given quantity.

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Total producer surplus is the sum of the[br]producer surplus of each seller. As I'll

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show you in a minute what this means[br]graphically is that total producer surplus

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is measured by the area above the supply[br]curve and above the price. Let's take a

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look, producer surplus is the area above[br]the supply curve and below the price.

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Here's our supply curve, suppose that the[br]price is $40 and the producer surplus at

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that price is this blue area right here.[br]We could think of this as the producer

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surplus at the lowest cost to suppliers[br]plus the producer surplus at the second

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lowest plus the producer surplus at the[br]third lowest, the fourth lowest and so

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forth. Until we get to the marginal[br]supplier and notice that the supplier on

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the margin earns no producer at all. It is[br]this supplier, their costs are just

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basically equal to the price, they're not[br]earning any producer surplus. Again, as

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with consumer surplus remember that we can[br]and in fact we will be calculating these

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areas using our area for the form of a[br]triangle. As with demand curves, supply

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curves can also shift, let's look at an[br]increase in supply first. Which way is

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this curve going to shift when we have an[br]increase in supply. Keep in mind that the

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quantity is down here so which way would[br]be an increased quantity? Like this, you

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might be a little confused at first[br]because it's also down.but it's to the

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right and down. We can understand this a[br]little bit better by thinking of exactly

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what it means. It means that at any given[br]price with the new supplier the increased

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supply, suppliers are willing to supply a[br]greater quantity. At the price of $10

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using the old supply curve they were[br]willing to sell 20 units.

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At a price of $10 with the new supply[br]curve at the increased supply they're now

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willing to sell 80 units. We can now[br]understand an increase in supply using the

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vertical reading. What the increase in[br]supply tells us is that for any quantity

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suppliers are now willing to sell that[br]quantity at a lower price. They used to

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need at least $10 per unit to sell this[br]many units. Now they're willing to sell

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that same number of units at a lower[br]price. So just thinking about this

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intuitively can you guess what is the[br]major factor that is going to increase

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supply? The major factor which is going to[br]increase supply is a reduction in costs.

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That's why you can also understand this[br]curve going down as costs fall. The reason

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supply increases is that costs are[br]falling. So both of these directions

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should now make sense to you. What about a[br]decrease in supply? That of course is just

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moving the supply curve in the opposite[br]direction, moving it to the left and up.

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Again we can understand what this means.[br]With the decrease in supply it says that

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suppliers at the same price they're now[br]willing to sell a smaller quantity than

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they were before. At the same price the[br]quantity that they are willing and able to

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sell is going down, a decrease in supply.[br]It also means that at the same quantity

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suppliers now require a higher price to[br]sell that quantity. With a decreased

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supply suppliers require a higher price to[br]sell the same quantity that they were

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selling before. So what would make[br]suppliers require a higher price to sell

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the same quantity?

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An increase in costs. Let's look at this[br]in a little bit more details. I'm now

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going to give you a list of important[br]supply shifters, but as with the demand

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shifters the point here is not to memorize[br]the list, the point is to understand that

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the major factor determining how supply[br]shifts is a change in costs, that is an

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increase in costs reduces the supply, a[br]decrease in costs increases the supply.

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Our task now is just to understand a whole[br]bunch of factors, how do they change

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costs. Some of these are pretty obvious,[br]for example technological innovations or

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changes in input prices. A change in the[br]prices of input labor, that is a change in

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wages can change costs. Cost of[br]production, taxes and subsidies,

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expectations, the entry or exit of[br]produces, changes in opportunity. Some of

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these are a little bit harder to[br]understand how they change cost. That's

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why in the next video I'm going to give[br]you some examples and step through them

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one by one. See you then.

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If you want to test yourself click[br]Practice Questions or if you're

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ready to move on click next video.