The Supply Curve Shifts
-
0:10 - 0:14- Now that you've got the basics of the
supply curve down, we'll jump into factors -
0:14 - 0:17which shift the supply curve.
-
0:22 - 0:24Here's the same list I showed
you before of important -
0:24 - 0:31supply shifters. Remember, the most basic
one is a change in costs. So really the -
0:31 - 0:36only question is, how does technological
innovations change costs? How do input -
0:36 - 0:43prices change costs? Taxes and subsidies,
expectations, entry or exit of producers? -
0:43 - 0:48Once we understand how these different
elements affect a firm's costs then we -
0:48 - 0:53know how the supply curve is going to
shift. By the way, I've given you a list -
0:53 - 1:00here but the goal is not to memorize the
list. The goal is to understand. And once -
1:00 - 1:05we do that then we'll be able to figure
out how any factor affects the supply -
1:05 - 1:13curve. Okay, let's do some examples. A
technological innovation lowers costs and -
1:13 - 1:19therefore increases the supply. That means
that sellers are willing to supply a -
1:19 - 1:26greater quantity at a given price or
equivalently they're willing to sell a -
1:26 - 1:31given quantity at a lower price. So let's
imagine that we have some genetically -
1:31 - 1:36modified seeds. What's the effect of
supply? We'll assume that the seeds for -
1:36 - 1:42example require less fertilizer. So let's
graph out of the effect of this innovation -
1:42 - 1:49would be on supply. Here's our old supply
curve with the old seeds. Now we have the -
1:49 - 1:55innovation. We have genetically modified
seeds which require less fertilizer and -
1:55 - 2:01create a reduction in cost. What does that
do to supply? It increases supply and that -
2:01 - 2:05means that the supply curve moves down and
to the right. -
2:06 - 2:13Why? Well, just read off what this means.
An increase in supply means that for any -
2:13 - 2:18given quantity the firm is now willing to
sell that quantity at a lower price than -
2:19 - 2:25before since their cost have fallen. The
minimum price that firms require in order -
2:25 - 2:32to sell this quantity has decreased. In
fact the minimum price that firms require -
2:32 - 2:39to sell any quantity has decreased.
Equivalently, at any price, now that their -
2:39 - 2:45cost have fallen the firms are willing to
sell more at that particular price. That's -
2:45 - 2:49what an increase of supply means. These
genetically modified seeds that reduced -
2:50 - 2:55costs and that increases supply. Let's
look at another important supply shifter, -
2:55 - 3:01changes in input prices, and let's do in
this case a decrease in supply. An -
3:01 - 3:08increase in the price of an input will
decrease supply. For example, if the -
3:08 - 3:12government were to increase environmental
regulations and requirements on gasoline, -
3:13 - 3:17that's going to cost a decrease in supply.
It doesn't mean that the government -
3:17 - 3:22shouldn't do that. Maybe it's worthwhile
but that will be the effect on supply. -
3:22 - 3:28Let's take a look. Here's our old supply
curve. Now we have increased rules and -
3:28 - 3:33regulations which increase costs or
there's an increase in the price of some -
3:33 - 3:39input that reduces supply. Reductions in
supply mean that the supply curve moves up -
3:40 - 3:46into the left. Again just read off what
that means. A reduction supply means that -
3:46 - 3:54at any price the firm is now willing to
sell a smaller quantity or equivalently it -
3:54 - 3:59means that for any particular quantity
where the reduction in supply with higher -
3:59 - 4:06costs the firm need a higher price.
Because their cost have gone up, the price -
4:06 - 4:13of the firm requires in order to sell any
particular quantity has increased. -
4:13 - 4:19Remember, this is the minimum price that
suppliers require to produce this quantity -
4:19 - 4:23and with higher costs that minimum price
has gone up, that's what a decrease in -
4:24 - 4:32supply looks like. Higher costs, decrease
supply. Let's look at a tax. A tax on -
4:32 - 4:37output is equivalent to an increase in
costs, and therefore a tax will decrease -
4:38 - 4:43the supply. Here we go. Suppose that
before the tax, firms were willing to sell -
4:44 - 4:50let's say 60 million barrels of oil per
day at a price of $40 per barrel. Now we -
4:50 - 4:58imagine there's $10 tax. How much will
firms require in order to sell 60 million -
4:58 - 5:04barrels of oil per day now that there is a
$10 tax? What would be the requirement for -
5:04 - 5:14that? $50. In fact, what a tax does is it
shifts the supply curve up by the amount -
5:14 - 5:19of the tax. In this case, by $10
everywhere along the supply curve. By the -
5:19 - 5:23way, notice we actually haven't said
anything here about what the effect of the -
5:23 - 5:28tax will be on prices. In fact we haven't
said anything at all about how prices are -
5:28 - 5:33determined. That's going to be in an
upcoming video on equilibrium. What we're -
5:33 - 5:38emphasizing now is how a tax or how
changes in input prices and so forth -
5:38 - 5:43affect the supply curve. The way we
analyze a tax is by shifting the supply -
5:44 - 5:50curve up by the amount of the tax. What
about a subsidy? A subsidy is just the -
5:50 - 5:55opposite of a tax. Instead of the
government taking with every unit that you -
5:55 - 6:01produce, the government gives some amount
of money for every unit which is produced. -
6:01 - 6:07A subsidy is equivalent to a decrease in
the firm's costs and therefore it -
6:07 - 6:13increases supply. Go ahead and graph the
effect on the supply curve of the subsidy -
6:13 - 6:19to say fast food producers. Suppose it's
aimed at helping them export overseas. -
6:19 - 6:25What would be the effect of a subsidy on a
supply curve for fast food producers? I'm -
6:25 - 6:29not actually going to show you that. If
you have any trouble graphing it, go back -
6:29 - 6:36and look at the tax example. A subsidy is
just a tax in reverse. Expectations. This -
6:36 - 6:41one is a little trickier but expectations
can also shift the supply curve. Imagine -
6:41 - 6:46for example the firm expect a higher price
for a good in the future, that increases -
6:46 - 6:52the cost of supplying the good now, the
opportunity cost. Since there's an -
6:52 - 6:57increase in cost, that decreases the
current supply of the good. This is -
6:58 - 7:03perhaps easiest to see if firms can store
the good. Suppose firms believe that the -
7:03 - 7:07price is going to be higher in the future,
therefore they're going to want to produce -
7:07 - 7:12more today. But instead of selling today,
they're going to want to store the good in -
7:12 - 7:17order to sell it in the future when the
price is higher. This will become more -
7:17 - 7:22important when we come back later and talk
about speculation. Let's see how this -
7:22 - 7:27works with the diagram. Here's the supply
curve currently. Now firms come to believe -
7:27 - 7:33that prices are going to be higher in the
future. So what do they do? They take some -
7:33 - 7:39of their current supply and they put that
supply into storage. They remove it from -
7:40 - 7:45the current market. Since that quantity is
no longer being supplied on today's -
7:45 - 7:51market, today's supply curve decreases.
The entry and exit of new producers is -
7:52 - 7:57another important supply shifter. It's
pretty easy to see that with entry, that -
7:57 - 8:01implies more sellers in the market that
increases supply. -
8:01 - 8:07Exit implies fewer sellers in the market,
decreasing supply. What will happen to the -
8:07 - 8:11supply of lumber with a free trade deal
with Canada? This actually happened of -
8:11 - 8:17course. Here's the domestic supply curve,
the U. S.supply curve without the free -
8:17 - 8:22trade deal. Now we get NAFDA, we get the
free trade deal and what that means is -
8:23 - 8:28that any price there are now more
suppliers. So there's a greater quantity -
8:28 - 8:36supplied at each particular price. In
addition, Canadian firms will have lower -
8:36 - 8:40costs in their American counterparts. Not
all of them but some of them are going to -
8:41 - 8:46have lower costs. That means that at any
quantity there's a lower price for the -
8:46 - 8:53same quantity. As entry increases supply
and for exit, the process just works in -
8:53 - 8:58reverse. Our final supply curve shifter
changes an opportunity cost is perhaps the -
8:58 - 9:04trickiest because we're usually thinking
about cost in terms of dollar costs. But -
9:04 - 9:08we have to keep in mind that the
fundamental concept of cost is opportunity -
9:09 - 9:15cost. Let's apply this and I think it will
become fairly easy to understand. Inputs -
9:15 - 9:19which are used in production have
opportunity costs. It can be used to -
9:19 - 9:26produce many different things. And sellers
will choose to employ their inputs in the -
9:26 - 9:32production of the highest priced final
good. For example, what happens to the -
9:32 - 9:38supply of soy beans when the price of
wheat increases? Here's a hint. Farmers -
9:38 - 9:45can use their land to grow soy beans or to
grow wheat. Farmers have a choice about -
9:45 - 9:50their use of land. So what happens to the
supply of soy beans when the price of -
9:50 - 9:55wheat increases? Let's look at this with
the graph. Here's our initial supply curve -
9:55 - 10:00for soy beans. It will label this low
opportunity cost, that means that the -
10:00 - 10:05price of wheat is low.
There's not much else useful to do with -
10:05 - 10:12this land other than to grow soy beans.
However, when the price of wheat goes up, -
10:12 - 10:18well then the opportunity cost of growing
soy beans has gone up. When the price of -
10:18 - 10:23wheat was low the cost of growing so beans
was low because what else were you going -
10:23 - 10:28to do with the land? Now that the price of
wheat has gone up, there's an alternative, -
10:28 - 10:34there's an opportunity. The farmers could
instead grow wheat, that means that -
10:34 - 10:38farmers are going to take some of their
land out of soy bean production and move -
10:39 - 10:45it into wheat production. So to produce
the same quantity of soy beans the farmers -
10:45 - 10:51are going to require a higher price
because their cost are now higher, their -
10:51 - 10:58alternative, their opportunity cost is
higher. How to put it differently. At the -
10:58 - 11:03same price of soy beans, farmers are now
going to be willing to supply fewer soy -
11:03 - 11:10beans because they've got other things to
do with their land such as growing wheat. -
11:10 - 11:14Here again is our list of important supply
shifters. These are not the only supply -
11:14 - 11:19shifters. There could be lots of things
which shift supply. In giving you this -
11:19 - 11:24list however, these are some of the most
important ones. But to understand how to -
11:24 - 11:29go about solving these problems, keep the
general procedure in mind. Figure out -
11:29 - 11:35first, what's the effect of this change on
costs? Once you know the effect of the -
11:35 - 11:42change on costs, you know how to shift the
supply curve. If cost decrease that's an -
11:42 - 11:49increase in supply. If cost increase
that's a decrease in supply. So whatever -
11:49 - 11:54shifter you'd get, figure out what the
effect of that is on costs and then work -
11:55 - 12:01out the effect on the supply curve, draw
the diagram, and you'll be fine. Thanks. -
12:02 - 12:07- If you want to test yourself,
click Practice Questions or if you're -
12:07 - 12:09ready to move on, just click Next Video.
- Title:
- The Supply Curve Shifts
- Description:
-
{'type': u'plain'}
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 12:15
Marilia_PM edited English subtitles for The Supply Curve Shifts | ||
Cindy Hurlow edited English subtitles for The Supply Curve Shifts | ||
Cindy Hurlow edited English subtitles for The Supply Curve Shifts | ||
Cindy Hurlow edited English subtitles for The Supply Curve Shifts | ||
Cindy Hurlow edited English subtitles for The Supply Curve Shifts | ||
Cindy Hurlow edited English subtitles for The Supply Curve Shifts | ||
Cindy Hurlow edited English subtitles for The Supply Curve Shifts | ||
MRU2 edited English subtitles for The Supply Curve Shifts |