A Deeper Look at the Supply Curve

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

I'm going to move
through this material

a little bit more quickly
than through demand

because many
of the ideas are similar.

The supply curve represents
the behavior of sellers

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

at different prices.

The quantity supplied
is the quantity that producers

are willing and able to sell
at a particular price.

Okay, here comes our supply curve
just as before.

The horizontal reading tells us
the quantity supplied

at each price, in other words,
how much suppliers

are willing and able to sell
at each price.

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

to sell 30 million barrels
of oil per day.

The vertical reading tells us
the minimum price

at which suppliers will sell
a given quantity.

For example
for the 50th millionth barrel of oil,

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

Once again the vertical reading
tells us the minimum price

at which suppliers will sell
a given quantity.

As before, sometimes
the horizontal reading

is a little bit easier to understand
some problems,

other times the vertical reading
is a little bit easier.

So it's important that you
be comfortable reading

the supply curve in both ways.

Producer surplus
is just the producers' version

of consumer surplus.

Remember, consumer surplus
is the consumers' gain

from exchange, so producer surplus
is the producers' gain

from exchange.

It's the difference
between the market price

and the minimum price
at which producers would be willing

to sell a given quantity.

Total producer surplus
is the sum of the producer surplus

of each seller.

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

is that total producer surplus
is measured by the area

above the supply curve
and below the price.

Let's take a look.

Producer surplus is the area
above the supply curve

and below the price.

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

and the producer surplus
at that price

is this blue area right here.

We could think about this
as the producer surplus

at the lowest cost to suppliers,
plus the producer surplus

at the second lowest,
plus the producer surplus

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

Until we get
to the marginal supplier

and notice that the supplier
on the margin

earns no producer surplus at all.

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

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

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

and in fact we will be
calculating these areas

using our formula
for the area of a triangle.

As with demand curves,
supply curves can also shift.

Let's look at an increase
in supply first.

Which way is this curve
going to shift when we

have an increase in supply.

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

would be an increased quantity?

It's like this.

You might be
a little confused at first

because that's also down.

But it's to the right and down.

We can understand this
a little bit better by thinking

about exactly what it means.

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

with the increased supply,
suppliers are now willing to supply

a greater quantity.

At the price of $10,
using the old supply curve,

they were willing to sell 20 units.

At a price of $10
with the new supply curve

with the increased supply,
they're now willing

to sell 80 units.

We can also understand
an increase in supply

using the vertical reading.

What the increase
in supply tells us

is that for any quantity,
suppliers are now willing

to sell that quantity
at a lower price.

They used to need
at least $10 per unit

to sell this many units.

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

at a lower price.

So just thinking about this
intuitively, can you guess what

is the major factor
that is going to increase supply?

The major factor which is going
to increase supply

is a reduction in costs.

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

as costs fall.

The reason supply increases
is that costs are falling.

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

What about a decrease in supply?

That of course, is just moving
the supply curve

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

Again we can understand
what this means.

With the decrease in supply,
it says that suppliers

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

a smaller quantity
than they were before.

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

to sell is going down,
a decrease in supply.

It also means that
at the same quantity,

suppliers now require
a higher price

to sell that quantity.

With a decreased supply,
suppliers require a higher price

to sell the same quantity
that they were supplying before.

So what would make suppliers
require a higher price

to sell the same quantity?

An increase in costs.

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

I'm now going to give you

a list of important
supply shifters,

but as with the demand shifters,
the point here

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

that the major factor determining
how supply shifts

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

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

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

how do they change costs.

Some of these are pretty obvious,

for example, technological
innovations

or changes in input prices.

A change in the price
of the input of labor,

that is a change in wages
can change costs,

the cost of production.

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

changes in opportunity costs.

Some of these
are a little bit harder

to understand how they change cost.

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

each of them,
and give you some examples,

and step through them one by one.

See you then.

- [Narrator] If you want
to test yourself,

click "Practice Questions."

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

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