Hi everybody. What is supply in economics? Well, before we go through this video, make sure you've watched my video on demand. A lot of the concepts here are very similar. We're going to be talking about the same kind of things as we did before. So, make sure you've watched that demand video first before watching this one. Supply is defined like this. It is the quantity of a good or service that producers are willing and able to produce at a given price in a given time period. Very similar to our demand definition with a few things change. The concept of willingness and ability is there again but now for producers. The law of supply now states that there is a direct relationship between price and quantity supply. The opposite basically to our demand relationship. So a direct relationship between price and quantity supply. What does that mean? That means as the price increases quantity supply increases too. As the price decreases quantity supply decreases too. Direct relationship. Whichever way price is going, quantity supply goes exactly the same way. We assume Cetra's parabus to get to the law of supply to get to this supply theory. Now, just like with demand, we can indicate these movements in price on the supply curve itself. Now, the supply curve is drawn upward sloping because that indicates this direct relationship. As price goes up, quantity supply goes up. So, the supply curve is drawn upward sloping. Let's show these price increases and these price decreases of it to really indicate the law of supply. So we'll start with a price of P1 here and that gives us a quantity supplied let's call it Q1. So as the price increases let's say from P1 to P2 you can see that quantity supplied has increased. Now we should know from the demand curve video that that is called an extension of supply. An extension of supply. So if supply increases by moving along the supply curve that's called an extension just like when demand increased when the price fell that was called an extension of demand. Another name is an expansion of supply if you want. Whereas when price decreases from P1 to P3 there is a reduction in supply but we know the technical term is a contraction of supply. A contraction of supply. So again very importantly to isolate this relationship um we assume setterist paras we let all other factors remain unchanged remain equal and that allows us to come up with this isolated relationship between price and quantity supply. It allows us to come to the law of supply and crucially how do we illustrate the law of supply on a diagram? Well we move along the supply curve. So when price changes, the price of a good or service itself changes, we move along the supply curve. If the price of a good or service goes up, we move up the supply curve. That's known as an extension of supply. If the price of a good or service decreases, we move down the supply curve. That's known as a contraction of supply. So when the price of a good or service changes, we move along the supply curve. Very similar concepts to when we study demand and the demand curve. But the key question is why? Why is there a direct relationship between price and quantity supply? Why do producers supply more when the price goes up? Why is their willingness and ability greater to supply when the price is higher? Well, very simply, because of a profit motive that producers have. Private producers have. Let's understand that by looking at price changes. Well, if the price goes up for a good or service, there's potentially more profit to be made if they can produce more and sell more. So there is a strong incentive when prices go up to produce more to supply more. Well, that explains it, isn't it? To make profit. If we go the other way, look on the x-axis here. Why when quantity goes up to suppliers want a higher price? Well, when quantity goes up, costs of production are going up, aren't they, for suppliers to produce those extra units? The costs are higher. Therefore, suppliers want a higher price to cover their costs of production to allow them to maintain their profit margins. So everything comes back to price. When prices are higher, there's more profit to be made if they produce more and sell more. If they produce more, they want higher prices to maintain their profit margins. So always think the reason that the supply curve is upward sloping. The reason for this direct relationship between price and quantity supplied is the profit motive. And we've shown that when prices change, we move along the supply curve. We assume sector is parable is to isolate that relationship. However, it's not just price that can affect supply. There are various non-pric factors that can affect supply as well. Let's have a look at those. Well, just like with demand, non-pric factors will shift the supply curve. So, if non-pric factors increase supply, the supply curve will shift to the right from S1 to S2. Whereas, if non-pric factors reduce supply, the supply curve will shift to the left from S1 to S3. But crucially, this is all happening at the same price. So, at the same price, supply is either increasing or decreasing. So you can see here supply is increasing from Q1 to Q2 if supply shifts to the right and decreasing from Q1 to Q3 if supply shifts to the left but all at the same price and let's call that price P1 in the market. So the question is again what are these non-pric factors that can affect supply and therefore shift the supply curve. Well a lot of these factors will affect costs of production. That's very important to remember as a generalization. A lot of these non-pric factors will change costs of production and costs of production clearly will influence the willingness and the ability to supply. So if your costs of production are lower as a business, you're willing at the same price to supply more because actually if you supply that extra unit, reduction in cost means you can cover your costs of production at the same price easily. So you're willing to supply that extra output knowing that your costs can be covered because they're lower at the same price of P1. So basically a reduction in cost of production will shift the supply curve to the right whereas an increase in cost of production will shift the supply curve left as producers are less willing and able to produce with higher cost of production at the same price. So can we be more specific now? What are we looking at? What are these specific non-pric factors? Well, now remember pints WC. This is a lovely memory device. Okay, just think when we drink loads of pints, right? Pints of water obviously in your case. When we drink loads of pints, what do we need? We need the WC, don't we? We need to go to the L. So just think pint WC for all the shifters of supply. Happy days. So what is P? P is productivity. Productivity of labor, productivity of capital, just productivity. So what do I mean by productivity of labor? Well, that's the output per worker per time period. So maybe in an hour. If workers become more productive, they're producing more. They're being paid the same, but they're producing more in a given time period. that's going to reduce cost of production and shift the supply curve to the right from S1 to S2. Whereas, if productivity of labor or if productivity of capital reduces, costs of production going to increase because you're paying workers uh the same amount, but they're producing less in a given time period, which will increase cost shifting supply to the left from S1 to S3. An indirect tax, basically a tax on production here, uh that firms have to pay will increase cost of production. So if an indirect tax has been implemented or has been increased, the supply curve will shift to the left from S1 to S3. Whereas if an indirect tax has been reduced or taken away, cost of production will decrease and therefore the supply curve will shift to the right from S1 to S2. The number of firms, this one doesn't have anything to do with cost of production. This one is just as simple as it sounds. The more firms that enter the market, so the more firms that are in the market, the supply curve will shift to the right from S1 to S2. There'll be more supply in the market. down. Whereas if firms leave the market, so there are less number of firms in the market, the supply curve shifts to the left left from S1 to S3. Technology massively increases um the willingness and ability to supply or decreases the willingness and ability to supply by affecting costs of production. There is a big link between technology and costs of production. Here an improvement in technology reduces costs of production and shifts the supply curve to the right from S1 to S2. Whereas if technology gets worse or becomes outdated, um then the supply curve is going to shift to the left from S1 to S3. So technology very important here. A subsidy, what is a subsidy? A subsidy is a money grant given by governments to producers to lower costs of production and to encourage an increase in output. So if a subsidy is been is given or it's been increased in size, then the supply curve is going to shift to the right because costs of production have been lowered. Whereas if a subsidy has been taken away or has been decreased in size, costs of production for a firm are going to increase and the supply curve is going to shift to the left from S1 to S3. Weather, again, this one doesn't necessarily have anything to do with cost of production. Good weather will allow supply to increase, will shift supply to the right from S1 to S2. Now, that could be excessive rainfall, that could be good weather, it could be excessive amounts of sunshine. Whatever that weather is which allows more supply uh will shift supply to the right. Whereas bad weather, whatever that weather might be, will shift the supply curve to the left from S1 to S3. And last one is a cheat. C stands for cost of production as a cheat, right? All the other factors that can affect cost of production. So things like transport cost, labor cost, the price of oil, because oil is often used in production for many different goods and services, raw material prices, uh utilities, so the price of gas, electricity, water, internet. We can even put rent in here if we wanted to. but also regulations, government regulations can increase costs of production. Things like health and safety standards, environmental policies. So think if any of these things increase, then the supply curve is going to shift to the left from S1 to S3. If any of these these things decrease in price or in cost, the supply curve is going to shift to the right from S1 to S2. So a bit of a cheat at the end, but makes the point, doesn't it? So you're thinking for general non-pric factors that will affect supply and therefore shift the supply curve. Generalize and think costs of production. Then remember pines WC I've put an asterisk a star next to all of the factors that clearly affect cost of production. It's only the number of firms and weather that don't directly affect costs of production here. Okay. So non-pric factors shift the curve. The price changing of the good or service itself means we move along the supply curve. Very important you remember all of this. That is supply covered, the supply curve covered fully as well. Thank you so much for watching guys. Stay tuned for the very very very important next video where we look at equilibrium. I'll see you all then.