Supply Explained

Introduction to Supply

• Mr. Clifford welcomes students to AC/DC Econ.

• Previous topic: Demand using milk. Current topic: Supply using dairy farmers.

Law of Supply

• States that there is a direct relationship between price and quantity supplied.

  • Example: Increase in milk price → increase in quantity of milk produced.

  • Incentive for dairy farmers to produce more milk due to higher profits.

• Supply curve is upward sloping.

  • Movement along the supply curve occurs with changes in price.

  • Shifts in the supply curve also occur.

Shifters of Supply (Five Key Factors)

1. Change in Price of Inputs/Resources

   • Rise in price of necessary resources (e.g., dairy cows) decreases supply of milk.

2. Number of Producers

   • Increase in number of dairy farmers increases the supply of milk.

3. Change in Technology

   • Technological advancements (e.g., new milking machines) boost productivity, increasing supply.

4. Government Involvement

   • Subsidy: Government financial support to encourage production → shifts supply curve to the right.

   • Tax: Financial charge on producers → shifts supply curve to the left, decreasing supply.

5. Future Expectations

   • If producers anticipate higher future profits, they may limit current supply.

Difference Between Supply and Quantity Supplied

• Supply does not change with price increases; it requires a shift due to other factors.

• Quantity supplied changes along the supply curve based on price adjustments.

Market Equilibrium

• Interaction of supply and demand sets the market equilibrium price and quantity.

  • Example: Equilibrium price for milk is $3.

• Disequilibrium: Occurs when prices deviate from equilibrium.

  • Example at $5: Quantity demanded (10 gallons) < quantity supplied (50 gallons) → surplus.

  • Surplus calculation: Quantity supplied - quantity demanded = 50 - 10 = 40 gallons.

  • Surplus self-corrects as producers lower prices to reach equilibrium.

Shortages

• Price drop to $1: Quantity demanded (80 gallons) > quantity supplied (10 gallons) → shortage.

• Shortage calculation: Quantity demanded - quantity supplied = 80 - 10 = 70 gallons.

• Shortages also self-correct as prices rise to match demand.

Conclusion

• Discussion covered how price influences supply and the concept of market equilibrium.

• Next video will focus on factors that shift the entire demand and supply curves.