Supply Lecture

Summary

In this lecture by George Frost, the intricate concepts of supply, its relationship with price, and how they are represented through graphs are discussed. Frost advises separating the understanding of demand from supply to avoid confusion. The lecture emphasizes the law of supply, which states that as the price of a product increases, the quantity supplied also increases, illustrating a direct relationship. Frost elucidates on various factors affecting supply, such as technology, resource prices, and taxes. The discussion also distinguishes between a 'change in supply' and a 'change in quantity supplied,' stressing the importance of this distinction in economic analysis.

Highlights

• The law of supply suggests that higher prices incentivize increased production. 📈
• Supply curve is always upward sloping, showing a positive relationship between price and quantity supplied. 🔄
• Key factors affecting supply include technology, resource prices, and regulatory changes. ⚙️
• A shift in the supply curve represents a change in supply, not to be confused with a movement along the curve which represents a change in quantity supplied. 🔀
• Understanding these concepts aids in forming accurate economic predictions. 📊

Key Takeaways

• Always separate demand from supply in your analysis to avoid confusion. 🎓
• The law of supply shows a direct relationship between price increase and quantity supplied. 📈
• Understand the factors that cause shifts in the supply curve, like technology and resource costs. 🔄
• Grasp the difference between a 'change in supply' and a 'change in quantity supplied.' 🔍
• Producer expectations can sometimes be tricky to predict, requiring expert knowledge. 🤔

Overview

In his enlightening lecture, George Frost meticulously deconstructs the concept of supply in economics, urging students to keep supply analysis separate from demand to avoid typical misunderstandings. He starts by explaining how like demand, supply too follows a well-defined law – the law of supply, which asserts that the quantity of goods supplied is directly related to its price, assuming all other factors remain constant.

Frost dives deeper into the elements that can influence the supply, such as improvements in technology, changes in resource prices, and shifts in regulations. These factors can lead to either an increase or decrease in supply, represented by shifts in the supply curve on a graph, often misinterpreted by students as an increase or decrease when it's actually a lateral shift.

He concludes by clarifying the difference between movement along a supply curve and a shift of the curve itself – a critical differentiation for anyone working within economics. By drawing attention to such nuances, Frost not only enhances understanding but also prepares students for real-world economic analysis and decision-making.

Chapters

• 00:00 - 01:00: Introduction to Supply In this chapter, the focus is on understanding supply, specifically the law of supply and how to graph the supply curve. The instructor emphasizes that while the framework is similar to that of demand, it is important to think about supply independently to avoid confusion. The concepts of demand and supply will be integrated later, but for now, students should concentrate solely on the supply side to better grasp the principles.
• 01:00 - 03:00: Law of Supply Explained In this chapter titled 'Law of Supply Explained', the concept of supply in economics is explained using a simple table format similar to that used for demand. The variables discussed include price and quantity supplied. At a price point of two dollars, a producer is willing to supply three units of a product. The chapter explores the behavior of the supplier as the price changes, particularly questioning whether the supplier will increase or decrease production as the price rises from two to four dollars.
• 04:00 - 06:00: Graphing the Supply Curve The chapter delves into the common misconception about the relationship between price and supply. It emphasizes the importance of separating demand from supply analysis. When the price of an item increases, it's crucial to focus on the supply side, disregarding the demand aspect momentarily despite typical assumptions that higher prices lead to lower demand.
• 06:00 - 11:00: Reasons Behind the Law of Supply The chapter discusses the reasons behind the law of supply, emphasizing the basic incentives for sellers to provide more of a product. As the marginal benefit of producing a product increases, sellers are inclined to produce more. The chapter notes that exact increases in supply depend on expertise in the specific market. As prices rise, the quantity supplied typically increases, using 'widgets' as an illustrative example.
• 11:00 - 16:00: Factors Affecting Supply The chapter discusses the direct or positive relationship between price and quantity supplied. As prices increase from nine to ten dollars, sellers increase supply from 12 to 15 units, reflecting the principle that higher prices incentivize sellers to supply more. The example illustrates the fundamental concept of supply in economics where the quantity supplied moves in the same direction as changes in price.
• 16:00 - 21:00: Graphical Representation of Supply Changes The chapter titled 'Graphical Representation of Supply Changes' discusses the positive correlation between the price and the quantity supplied of a good, which is a fundamental concept in economics known as the law of supply. It explains that as the price increases, the amount supplied also increases, illustrating a direct relationship. The chapter uses a table to highlight this relationship and defines the law of supply.
• 23:00 - 28:00: Change in Supply vs. Change in Quantity Supplied The chapter 'Change in Supply vs. Change in Quantity Supplied' discusses how the quantity supplied is directly related to its price, assuming all other factors remain constant (ceteris paribus). The importance of the ceteris paribus assumption is highlighted, as it allows for the isolation of the price factor by holding other variables constant. If production costs increase as prices rise, it might not be straightforward for producers to increase production, reinforcing the necessity of this assumption. Additionally, the chapter provides a reminder of concepts discussed in the demand price context.

Supply Lecture Transcription

• 00:00 - 00:30 okay what we're going to do now is we're going to do the same thing that we did for demand and the law of demand and the graph of the demand curve we're going to do the same thing for supply and the law supply and the graph of the supply curve so basically analytically it'll be the same the only thing is i don't want you to think about demand while we're doing this i keep it separated we'll put them back together but students do make mistakes when they're constantly thinking about demand when they do supply all right even though the framework is going to be the same so i'm going to do is i'm just going to draw a
• 00:30 - 01:00 table just like we did for demand price is going to be the um one of the variables and quantity supplied is going to be the other variable and so at a price of two dollars let's assume that this producer is willing to um sell three of these okay so he's willing to bring three to the marketplace the question is as the price goes up what is the seller willing to do let's say the price goes from two to four are they going to want to make more they're going to want to make less
• 01:00 - 01:30 now some of you are probably saying yes if you're like my students in my classes you're probably saying they want to make less when the price goes when the price goes up but be careful why are you saying that you know students always say to me oh because when the price goes up buyers are going to want to buy less remember what i told you a few seconds ago don't talk about demand when you're talking about supply keep it separated the question i'm really asking you is as the price goes up if buyers were still willing to buy the item and the price was higher would
• 01:30 - 02:00 the seller want to sell more and the answer is of course right we're talking about there's some complicated reasons behind this but the basic reason is basic incentives you're being the marginal benefit of providing this particular product is going up so therefore um you'd want to produce more so how much more we don't know unless you're an expert in this particular market again we'll say we're doing widgets again that let's say it goes to six and ended up as the price goes up again the amount supplied is going to go up
• 02:00 - 02:30 again let's say to nine as the price goes up to eight dollars let's say the amount uh the seller's gonna bring us 12 and then at ten dollars let's say they're going to bring 15. so if you notice you look at the table when the price is going up the quantity supplied is going up well if you remember our description of mathematical relationships this is known as a direct relationship or if you want a positive relationship one one when one goes one's going up here right two all the way to ten the amount supplied is also going up they're moving in the same direction
• 02:30 - 03:00 that's what makes it a a direct relationship okay let's just take that arrow out of there and um and go back to our table okay so now we see the table so the price is going up the amount supplied is going up there's a positive relationship it's always a positive relationship and therefore this is known in economics as the law of supply so let me just define the law of supply though i think you can already see the definition the law supply is defined as the quantity of a good supply
• 03:00 - 03:30 is directly related to its price ceteris paribus right other things held constant now just a couple things is the ceteris paribus part important yeah absolutely right as price is going uh up if the cost of producing the item are going up it's not necessarily clear that the producer would want to produce produce more so we have to hold everything else in the world constant when we analyze those secondly a reminder from from when we talked about the demand price
• 03:30 - 04:00 price is our um prices are dependent i'm sorry independent variable price is our cause variable right we are saying that price is causing quantity supplied to go up we're not saying that quantity supplied is causing price to go up that wouldn't make any any sense at all um and then finally um we are this is not a law passed by government i know it seems silly but students sometimes think that all laws are passed by government this is a scientific law or if you want an
• 04:00 - 04:30 economic law uh when the price goes up two to ten the quantity supplied goes up from three to fifteen okay all right um so let's just set this up again all right get rid of this get rid of this okay all right so now we're back to where we were all right uh so what i want to do is i want to draw a graph all right on my vertical axis i'm going to put the price on the horizontal axis i'm going to put quantity and now i'm just going to plot my points right so at a price of two dollars
• 04:30 - 05:00 the amount being supplied is three at a price of four dollars the amount being supplied is six at six dollars the amount being supplied is nine and so all you have to do to get a supply curve is you see you have these three dots here right one two three where the where the points intersect right and then you just draw a
• 05:00 - 05:30 line through it and that would be your supply curve all right and that shows what kind of slope you have a positive slope right it's an upward sloping line why is that because when price goes up quite supply goes up there's that direct relationship again assuming everything else stays the same so we'll always have a positive slope yeah it's always going to have a positive slope as long as the law of supply is applying and it's called the law supply for a reason because this is the the way we expect the world to work okay and so we're
• 05:30 - 06:00 going to do now is we're going to talk to the talk about the reasons behind the law of supply and that's what we'll turn to next okay now you've seen uh what a supply curve looks like that it has a positive slope and this is based on the law of supply right that there is always this direct relationship between the quantity of the good supply and its price assuming everything else is held constant
• 06:00 - 06:30 now if you remember we did the law of demand i explained to you the reasons behind the law of demand why was there this law of demand it wasn't just common sense and those reasons if you remember were the real income effect the substitution effect and the law of diminishing margin utility well just like there are reasons behind the law of demand there are reasons behind the law of supply and that's what i want to talk about now the first reason doesn't even have a name it's basically it is close to common sense it basically just says that look when the price of a product goes up producers have a greater incentive to
• 06:30 - 07:00 produce the product because the rewards are greater right if you think back to marginal analysis when the price is going up assuming everything else stays constant that means the marginal benefit of producing is increasing well if the marginal benefits increasing and the marginal cost is staying the same then you would expect all else being equal that producers would produce more and so that's what we're saying there's a basic incentive sometimes i call it the rewards effect but that's just to give it a name because one girl was very upset that it didn't have a name she's like you got
• 07:00 - 07:30 panic says if it doesn't have a name i won't have anything to put on the other side of my flash cards how will i study so if you want to give it a name fine we'll call it the rewards effect but it really is made up the reasoning though is solid the second reason behind the law of supply has to do with something we learned earlier in the course and that's the law of increasing marginal opportunity cost you remember that law we talked about it during economic principle number five if you don't remember it is that shaved heads example and if you don't remember it based on that you might want to go back and review it
• 07:30 - 08:00 so how does the law of increasing marginal opportunity cost relate to the law supply well let's try this hypothetical let's say you try to produce hamburgers and with to produce those hamburgers you can use one of two resources either male cows or female cows who would you use first well i know some of you are saying there's no such thing as a male cow right what are they called bulls yeah but then water steer confuses me so we're just going to go with male cows and female cows so who would you kill first in order to produce hamburgers the male cow or the female cow well you'd want to produce
• 08:00 - 08:30 the hamburger with the resource which had the lowest opportunity cost first right lower cost first so who has a lower opportunity cost male cows or female cows well hopefully you realize that female cows have a much higher opportunity cost male cows have a much lower opportunity cost this is for two reasons right the female cows give us milk and also they're more important to the reproductive process for cows than are the male cow i had a student who once gave a very strange answer to this i said who do you kill first male cows or female cows
• 08:30 - 09:00 he said oh my gosh you gotta do this very carefully so what do you mean he said you gotta kill them in equal proportion i said what do you mean he said if you kill a male cow kill a female cow if you kill female cow kill a male cow the ratio has to remain relatively the same i said why is that he said come on you know i said no i don't know he said reproduction i said what do you think the cows grow up together they go to cop prom and they get married and they pair off have camped babies together it's a very skewed understanding of the animal reproduction in any event let's see how this law of increasing marginal opportunity cost
• 09:00 - 09:30 relates to the law supply if we were to produce more hamburgers i'm not saying we will but if we were to produce more hamburgers what would we eventually have to start using if we kept on producing them if we kept on producing them we'd have to start using those male c those female cows in which case we'd have to start to get a higher opportunity cost but we don't want that so we would kind of say well we're not going to produce more hamburgers just because people want more hamburgers isn't going to make us kill our female cows because they have a high opportunity cost but what would do it
• 09:30 - 10:00 well not just wanting them but if the price went up for the hamburger if people were paying us more money for the hamburger then those hamburger producers would be more willing to kill those female cows and pay the high opportunity costs because they're getting that higher marginal benefit so that's the second reason behind the law of supply right if we were to produce more we know that the operating marginal opportunity cost goes up so we won't produce more unless the price goes up first and then if the price goes up first
• 10:00 - 10:30 then the amount supplied would go up etcetera's peripherals and notice that's a positive relationship right price is going up and then quantity supplied is going up so those are the two reasons behind the law of supply the idea that when the price goes up the reward is higher and secondly when the price goes up it compensates us for those higher marginal opportunity costs so now we're more able to produce more and that's kind of the logic behind the law of supply so what we're going to turn to next is we're going to talk about
• 10:30 - 11:00 all those factors that we're holding constant right the law supply says the quantity of a good supplied is directly related to its price other things held constant i want to talk about how those other things held constant affect supply and that's what we're going to do next okay so what are the things that we're holding constant in our uh along our supply curve that if they change would change supply
• 11:00 - 11:30 all right so we're going to talk about a few of those factors now the first is technology right when technology increases technology and producing an item increases that lowers the cost of producing the item that's why the firm is adopting the new technology so when technology goes up supply goes up or technology goes down supply goes down that's a direct or positive relationship so when there's technology increases supply increases positive relationship that's one factor another factor that affects supply is the price
• 11:30 - 12:00 of resources right when the price of a resource goes up it becomes more expensive produce that item right i'm not talking about the price of the product now price of the resource if the price of labor the price of capital the price of land or the price of entrepreneurial skills go up then you'd expect to become more costly to produce the item and you know in this life when it becomes more costly to do something basic incentives say people want to do it less so when the price of resource goes up
• 12:00 - 12:30 supply goes down that means there's an inverse relationship between the price of a resource and supply how about a third factor how about taxes and regulations when taxes and regulations go up on a supplier right the cost of producing the item go up which means the supply is going to go down right so the higher the tax the more the regulations the lower the supply now listen i'm not saying the tax is a bad idea i'm not saying the regulation is a bad idea you'd have to
• 12:30 - 13:00 evaluate um you know what was the benefit you were getting from the tax and regulation but it's certainly going to cause us to have less supply there's if taxes go up there's an inverse relationship when you lower taxes supply goes up inverse relationship now the fourth factor um i'm going to refer to as the profitability of alternative goods what are your other options um so if you're a producer of some particular item let's say you produce let's say you're a supplier of milk and the profits of producing hamburgers go up
• 13:00 - 13:30 well what are you going to do well you have these resources right these these cows that could be used for hamburger meat if the profits of hamburgers go up you'd expect that the supply of milk would go down because what would hamburger producers start to do if those profits went significantly up they'd start to kill off their cows and the supply of milk would go down so when the your profits go up of an alternative good the opportunity cost of producing this good gets higher so therefore you'd expect when the opportunity cost
• 13:30 - 14:00 goes up supply will go down so the profits of an other alternative go up supply goes down and that's an inverse relationship that's the fourth factor fifth factor for supply is very simple number of producers more producers more supply less producers less supply now individual market share may be different but for the market as a whole the more producers we have the larger the supply is going to be and that's a so that's a direct relationship
• 14:00 - 14:30 now the sixth factor is a little complicated it's called producer expectations this is what i'd like to say about that producer expectations about the future will certainly affect producer behavior but in terms of formulating questions and this i can't give you like always a positive or always a negative relationship it really depends on what they what's what the expectation is is this a weather expectation uh is this a market condition expectation maybe it's a future price expectation that's usually the easiest one to talk about so let's just talk about that if you're a supplier and you expect the
• 14:30 - 15:00 future price of your product to go up what will happen to supply well you might be able to if you can hold off your supply now and then put it on the market in the future to take advantage of the higher price so a higher future price would mean supply would be reduced now that's one way of looking at it i did have one student who said he didn't know if that was exactly true he thought that the price was going up in the future that in his business i forget what it was now that you had to start supplying more now because if you didn't
• 15:00 - 15:30 nobody would want to use you in the future that you had to kind of get in the market earlier this may be true this is an empirical question and this is why i kind of get a little bit nervous about about giving questions on producer expectations because i really feel you have to be an expert an economist in that particular industry and we're just doing the general rules of economic theory so do producer expectations matter if they do the good news from your perspective is on a test i'm not going to give you a question on producer expectations
• 15:30 - 16:00 please do not erase producer expectations for your notes now i don't do not obliterate knowledge just because i said it's not going to be on the test reducer expectations matter uh they matter in important ways i'm just not going to happen to test you on them so if you want to write a little note not on the test that's fine but please don't obliterate the knowledge okay so those are the six factors that we're going to talk about that affect supply those are technology price of resources taxes and regulations profitability of alternative goods number of producers and producer
• 16:00 - 16:30 expectations they will all affect what happens to supply and depending on whether it's a direct relationship or inverse relationship that'll tell us what we do with the supply curve so we have to turn to next is how to show you graphically how those changes in supply will show up on the graph how those changes and those factors that we've been holding constant how they will change our graph and that's what we're going to turn to next
• 16:30 - 17:00 okay i'm gonna uh direct your attention to the graphs that we did earlier if you notice in the graph we have price and we have quantities supplied these are the same numbers price of two dollars quantity supplied is three price of four dollars quantity supplied six six dollars is nine eight dollars is twelve ten dollars it's fifteen right illustrates the law supply as price goes up quantity supplied goes up assuming everything else is held constant right
• 17:00 - 17:30 all those factors that we just talked about technology price of resources taxes and regulations profitability of alternative goods number producers and producer expectations are all held constant in that table they're not changing that's how we were able to get that law of supply right well what i want to do now is i want to try to talk about what happens when one of those factors changes remember we typically just change one factor at a time so we want to change one of these factors and so let's imagine that technology changes okay let's imagine technology goes up so
• 17:30 - 18:00 if you remember from our just our past discussion here if technology goes up that's going to lower the cost of production and allow producers to produce more so in our chart let's make a little note technology increases and then let's um we'll call now we're going to get a new supply right we're going to get a whole new set of numbers as you just told me or as i just told you that when technology goes up supply is going to go up so we're going to get a whole new
• 18:00 - 18:30 table and we're going to construct new numbers so at two dollars they used to um they the quantity supplied used to be three right but now it's going to be something bit larger than three i'm just gonna make up a number seven i once had a student who guessed at all the numbers that uh i were coming next he says i know what the numbers are i can guess and he would guess and inevitably he'd get it wrong because i would just change the number on him every time he guessed the number uh they took him three or four times before somebody pointed out that i was just screwing with them so
• 18:30 - 19:00 where these numbers coming from i'm making them up but i have to make them up in a way that's consistent with what you've learned so is this consistent with what you've learned sure it is right because um with two things we said technology goes up that means that the amount supply is going to go up it used to be three now it's seven at a price of two at four dollars it used to be six what is it now it's something more than six it also has to be more than seven right because it has to still be consistent with the law of supply so i'll make up a number 13. at six dollars they used to
• 19:00 - 19:30 be nine now i'm gonna make it 19. at eight dollars used to be 12 let's say it's 25 now at 10 it used to be 15 now it's 31. so notice what happens at each and every price at two dollars we now have seven at four dollars we now have thirteen at six dollars we now have nineteen at eight dollars we now have 25 at 10 we now have 31. all right so it's still a direct relationship right as price goes
• 19:30 - 20:00 from 2 to 10 the amount supply is going up but it's at higher amounts right so let's look at how that affects our graph so at our point before in our graph we were at two dollars and three units being supplied right but now that it's um at two dollars now that there's this new technology uh in making the product um it's now going to be two end if you look at our chart two and seven so i'll make a little point right there two and seven and at four it used to be um uh uh six all right it used to be six four and six
• 20:00 - 20:30 but now it's four and thirteen so um let me just erase this for a second and let me make this line a little bit longer and then we will put in a quantity over here and now at four dollars it used to be six and now it's 13. so now we connect that point so now we've got the beginnings of a supply curve right and if i had more room i could go ahead and plot the rest of the points but we don't really need to do that
• 20:30 - 21:00 so what do i do with the dots once i have them i connect them and if you notice we get a positively sloped supply curve it is now it is an increase in supply this shows an increase in supply if you notice the supply curve is shifting to the right to the right means it's increasing because the numbers along our horizontal axis get larger as we go to the to the right now i will tell you students will often look at this graph and tell me it's a decrease in supply can you see why they make that mistake
• 21:00 - 21:30 if you can you probably won't make it yourself they look at the graph and they say oh the supply curve is shifting down but i don't want you to think of the curves as shifting up or down at least not in supply and demand diagrams they're either shifting to the left or the shifting to the right when they shift to the right they're increasing when they shift to the left they're decreasing and these arrows are going to your right going to the right so that means that this is an increase in supply so this is how you show an increase in supply on the graph now if there was a decrease in supply the supply curve
• 21:30 - 22:00 would have shifted in which direction it would have shifted to the left and your supply curve would shift back from s1 back to the original supply curve it would shift left and so that's the way you want to think of supply when one of the ceteris paribus factors changes if it leads to an increase in supply the whole curve shifts right and if it's a decrease in supply the curve will shift to the left notice how that's different from what we showed earlier what we showed earlier was when the price of the product is 2
• 22:00 - 22:30 and if the price of the product rose up to 4 we would have moved along our curve from the point of quantity of 3 up to the quantity of 6. we move right along the curve that's very different right it's showing an increase in the amount supplied but in this case it's happening because the price is changing whereas in the case that we just did it was because technology was changing which shifted the curve to the right so we're now going to turn to an area which
• 22:30 - 23:00 is going to help you understand about this difference between the movement along the curve right here and the difference in the shift in the curve right here and that's going to be how to tell the difference between a change in quantity supplied and a change in supply this arrow along the line is actually going to be a change in quantity supplied when we move along the line and when we shift the curve it's going to lead to a change in supply when to use what term and and therefore what to do
• 23:00 - 23:30 with the curves is important and that's what i'm going to discuss with you next final thing i want to go over with supply is explaining the difference between a change in supply and a change in quantity supplied now if you remember we did this when we talked about and versus quantity demanded it's really the same rule so let me just remind you
• 23:30 - 24:00 or let me apply this rule the same rule to the supply all right if the price of the good that you're talking about changes then there is a change in quantity supplied if a factor other than the price of the good changes then there is a change in supply now why would make such a big difference between quantity supplied and a change in supply again it has to do with the graph if there's a change in quantity supplied you move along the curve if there's a change in supply
• 24:00 - 24:30 then you shift the curve so let me just make sure we understand this if the price of pizza increases should i say there's an increase in the quantity supplied to pizza or an increase in the supply of pizza well hopefully you're saying increase in quantity supply to pizza why because the price of the product changed therefore used the term quantity supplied what if technology changed all right if technology of producing pizza changed then instead of saying an increase in the quantity supply to pizza you'd say
• 24:30 - 25:00 there's an increase in the supply of pizza again why because it's a factor other than the price of the good i think most of you can understand that the only tricky cases usually come in is when the word price appears in the question and it's not the price of the good let me give you an example um if the price of labor increases what happens to the what happens in to the supply of pizza or is it what happens to the quantity supply to pizza right so let's
• 25:00 - 25:30 take a look at this if the price of labor increases should i say we know that if price of labor goes up that's a resource right it becomes more expensive to make the item therefore producers are going to produce less so if the price of labor increases should i say there's a decrease in the quantity supplied of pizza or should i say there's a decrease in the supply of pizza okay now some of you i know are saying well it's quantity supply because i heard the word price but that's not the rule right it's got to be the price of the product so when the price of labor
• 25:30 - 26:00 goes up that's a change in the price of a resource that's a factor other than the price of the good so therefore you wouldn't say quantity supplied in that case you'd say supply decreases the price of labor goes up the supply of the product goes down and the supply curve shifts to the left okay so again review those the stuff with quantity demand and demand review this with quantity supplied and supply it's very important in terms of in terms of terminology and take a look at those my econ lab questions either the study
• 26:00 - 26:30 questions on this or questions from your homework that should help you understand the distinction between when you should use one and when you should use the other