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- [Alex] Today we turn to look[br]at the supply curve.

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I'm going to move[br]through this material

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a little bit more quickly[br]than through demand

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because many[br]of the ideas are similar.

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The supply curve represents[br]the behavior of sellers

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and the supply curve is a function[br]that shows the quantity supplied

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at different prices.

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The quantity supplied[br]is the quantity that producers

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are willing and able to sell[br]at a particular price.

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

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The horizontal reading tells us[br]the quantity supplied

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at each price, in other words,[br]how much suppliers

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are willing and able to sell[br]at each price.

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At a price of $20 per barrel,[br]suppliers are willing and able

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to sell 30 million barrels[br]of oil per day.

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The vertical reading tells us[br]the minimum price

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at which suppliers will sell[br]a given quantity.

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For example[br]for the 50th millionth barrel of oil,

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suppliers are willing and able[br]to sell that barrel of oil for $55.

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Once again the vertical reading[br]tells us the minimum price

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at which suppliers will sell[br]a given quantity.

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As before, sometimes[br]the horizontal reading

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is a little bit easier to understand[br]some problems,

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other times the vertical reading[br]is a little bit easier.

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So it's important that you[br]be comfortable reading

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the supply curve in both ways.

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Producer surplus[br]is just the producers' version

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of consumer surplus.

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Remember, consumer surplus[br]is the consumers' gain

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from exchange, so producer surplus[br]is the producers' gain

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from exchange.

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It's the difference[br]between the market price

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

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to sell a given quantity.

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Total producer surplus[br]is the sum of the producer surplus

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of each seller.

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As I'll show you in a minute,[br]what this means graphically

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is that total producer surplus[br]is measured by the area

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above the supply curve[br]and below the price.

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Let's take a look.

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Producer surplus is the area[br]above the supply curve

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and below the price.

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Here's our supply curve --[br]suppose that the price is $40

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and the producer surplus[br]at that price

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is this blue area right here.

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We could think about this[br]as the producer surplus

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

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at the second lowest,[br]plus the producer surplus

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at the third lowest,[br]the fourth lowest and so forth.

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Until we get[br]to the marginal supplier

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and notice that the supplier[br]on the margin

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earns no producer surplus at all.

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That is, this supplier, their costs[br]are just basically equal

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

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Again, as with consumer surplus,[br]remember that we can,

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and in fact we will be[br]calculating these areas

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using our formula[br]for the area of a triangle.

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As with demand curves,[br]supply curves can also shift.

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Let's look at an increase[br]in supply first.

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Which way is this curve[br]going to shift when we

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have an increase in supply.

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Keep in mind that the quantity[br]is down here, so which way

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would be an increased quantity?

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It's like this.

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You might be[br]a little confused at first

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because that's also down.

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But it's to the right and down.

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We can understand this[br]a little bit better by thinking

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about exactly what it means.

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It means that at any given price,[br]with the new supplier,

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with the increased supply,[br]suppliers are now willing to supply

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a greater quantity.

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At the price of $10,[br]using the old supply curve,

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they were willing to sell 20 units.

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At a price of $10[br]with the new supply curve

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with the increased supply,[br]they're now willing

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to sell 80 units.

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We can also understand[br]an increase in supply

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using the vertical reading.

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What the increase[br]in supply tells us

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is that for any quantity,[br]suppliers are now willing

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to sell that quantity[br]at a lower price.

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They used to need[br]at least $10 per unit

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to sell this many units.

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Now they're willing to sell[br]that same number of units

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at a lower price.

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So just thinking about this[br]intuitively, can you guess what

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is the major factor[br]that is going to increase supply?

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The major factor which is going[br]to increase supply

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is a reduction in costs.

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That's why you can also understand[br]this curve going down

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as costs fall.

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The reason supply increases[br]is that costs are falling.

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So both of these directions[br]should now make sense to you.

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What about a decrease in supply?

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That of course, is just moving[br]the supply curve

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

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Again we can understand[br]what this means.

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With the decrease in supply,[br]it says that suppliers

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at the same price,[br]they're now willing to sell

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a smaller quantity[br]than they were before.

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At the same price, the quantity[br]that they are willing and able

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to sell is going down,[br]a decrease in supply.

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It also means that[br]at the same quantity,

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suppliers now require[br]a higher price

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to sell that quantity.

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With a decreased supply,[br]suppliers require a higher price

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to sell the same quantity[br]that they were supplying before.

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So what would make suppliers[br]require a higher price

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to sell the same quantity?

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An increase in costs.

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Let's look at this[br]in a little bit more detail.

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I'm now going to give you

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a list of important[br]supply shifters,

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but as with the demand shifters,[br]the point here

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

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that the major factor determining[br]how supply shifts

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is a change in costs,[br]that is, an increase in costs

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

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

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how do they change costs.

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Some of these are pretty obvious,

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for example, technological[br]innovations

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or changes in input prices.

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A change in the price[br]of the input of labor,

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that is a change in wages[br]can change costs,

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the cost of production.

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Taxes and subsidies, expectations,[br]the entry or exit of producers,

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changes in opportunity costs.

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Some of these[br]are a little bit harder

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to understand how they change cost.

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That's why in the next video,[br]I'm going to go through

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each of them,[br]and give you some examples,

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and step through them one by one.

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See you then.

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- [Narrator] If you want[br]to test yourself,

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click "Practice Questions."

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Or if you're ready to move on,[br]just click "Next Video."

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