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

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I'm going to move
through this material

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a little bit more quickly
than through demand

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because many
of the ideas are similar.

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The supply curve represents
the behavior of sellers

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and the supply curve is a function
that shows the quantity supplied

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at different prices.

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The quantity supplied
is the quantity that producers

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are willing and able to sell
at a particular price.

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Okay, here comes our supply curve
just as before.

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The horizontal reading tells us
the quantity supplied

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at each price, in other words,
how much suppliers

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are willing and able to sell
at each price.

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

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to sell 30 million barrels
of oil per day.

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The vertical reading tells us
the minimum price

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at which suppliers will sell
a given quantity.

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For example
for the 50th millionth barrel of oil,

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

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Once again the vertical reading
tells us the minimum price

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at which suppliers will sell
a given quantity.

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As before, sometimes
the horizontal reading

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is a little bit easier to understand
some problems,

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other times the vertical reading
is a little bit easier.

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So it's important that you
be comfortable reading

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the supply curve in both ways.

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Producer surplus
is just the producers' version

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of consumer surplus.

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Remember, consumer surplus
is the consumers' gain

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from exchange, so producer surplus
is the producers' gain

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from exchange.

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It's the difference
between the market price

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and the minimum price
at which producers would be willing

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to sell a given quantity.

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Total producer surplus
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,
what this means graphically

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is that total producer surplus
is measured by the area

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above the supply curve
and below the price.

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Let's take a look.

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Producer surplus is the area
above the supply curve

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and below the price.

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

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and the producer surplus
at that price

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is this blue area right here.

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We could think about this
as the producer surplus

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at the lowest cost to suppliers,
plus the producer surplus

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at the second lowest,
plus the producer surplus

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at the third lowest,
the fourth lowest and so forth.

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Until we get
to the marginal supplier

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and notice that the supplier
on the margin

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earns no producer surplus at all.

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That is, this supplier, their costs
are just basically equal

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

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Again, as with consumer surplus,
remember that we can,

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and in fact we will be
calculating these areas

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using our formula
for the area of a triangle.

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As with demand curves,
supply curves can also shift.

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Let's look at an increase
in supply first.

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Which way is this curve
going to shift when we

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have an increase in supply.

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Keep in mind that the quantity
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
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
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,
with the new supplier,

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with the increased supply,
suppliers are now willing to supply

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a greater quantity.

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At the price of $10,
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
with the new supply curve

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with the increased supply,
they're now willing

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to sell 80 units.

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We can also understand
an increase in supply

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using the vertical reading.

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What the increase
in supply tells us

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is that for any quantity,
suppliers are now willing

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to sell that quantity
at a lower price.

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They used to need
at least $10 per unit

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to sell this many units.

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

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at a lower price.

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So just thinking about this
intuitively, can you guess what

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is the major factor
that is going to increase supply?

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The major factor which is going
to increase supply

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is a reduction in costs.

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

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as costs fall.

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The reason supply increases
is that costs are falling.

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So both of these directions
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
the supply curve

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

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Again we can understand
what this means.

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With the decrease in supply,
it says that suppliers

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

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a smaller quantity
than they were before.

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

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to sell is going down,
a decrease in supply.

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It also means that
at the same quantity,

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suppliers now require
a higher price

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to sell that quantity.

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With a decreased supply,
suppliers require a higher price

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to sell the same quantity
that they were supplying before.

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So what would make suppliers
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
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
supply shifters,

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but as with the demand shifters,
the point here

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is not to memorize the list,
the point is to understand

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that the major factor determining
how supply shifts

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is a change in costs,
that is, an increase in costs

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reduces the supply, a decrease
in costs increases the supply.

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Our task now is just to understand
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
innovations

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or changes in input prices.

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A change in the price
of the input of labor,

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that is a change in wages
can change costs,

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the cost of production.

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Taxes and subsidies, expectations,
the entry or exit of producers,

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changes in opportunity costs.

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Some of these
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,
I'm going to go through

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each of them,
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
to test yourself,

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click "Practice Questions."

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

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♪ [music] ♪