A Deeper Look at the Supply Curve

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- 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.

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 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 above 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 of 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 at all. It 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 area for the form 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? Like this, you

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

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

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

supply, suppliers are 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 at the increased supply they're now

willing to sell 80 units. We can now
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

selling 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 details. 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 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
prices of input labor, that is a change in

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

expectations, the entry or exit of
produces, changes in opportunity. 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 give
you some examples and step through them

one by one. See you then.

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

ready to move on click next video.