Hey! How you doin' econ students! This is Mr. Clifford. Welcome to AC/DC Econ!
In the last video we talked about demand using milk, and in this video we are gonna talk about supply using dairy farmers.
Paul, this is just stupid. Why are we doing this? I look more like a cowboy than I do a dairy farmer.
Actually a cowboy is what a dairy farmer should be called.
Cowboys, the way we know them, should be called a horse boy.
The Dallas Horse boys has a pretty nice ring to it.
Now, if there's one thing I know about, it's dairy farmin'.
Just joking, I don't know anything about dairy farming, but I do know about supply and the Law of Supply.
The Law of Supply says there's a direct relationship between the price and the quantity supplied.
When the price increases for milk, that's gonging to increase the quantity of milk produced.
This is because an increase in price, gives an incentive to dairy farmers to produce more,
because they want to make more profit.
So a supply curve is upward sloping. So when the price increases the quantity supplied increases.
And again when there is a change in price; that moves along the supply curve.
But the supply curve can also shift.
Just like demand, an increase in supply is always to the right and a decrease is always to the left.
Using milk as our example, lets talk about the five shifter's of supply.
Man, I just filmed this after drinking all of that milk. Oh my gosh, that's horrible! Woo boy!
The first one is the change in the price of inputs, or resources.
So if there was a huge increase in the price of dairy cows, that would cause the supply of milk to decrease.
Since you need cows to produce milk,
an increase in the price of that key resource means we would be producing less milk.
The second shifter is number of producers.
So if, out of nowhere, there is an increase in dairy farmers, that would increase the supply of milk.
The third shifter is a change in technology that would affect productivity.
So new advanced milking machines would cause the supply of milk to increase and shift to the right.
Another shifter is government involvement, such as taxes or subsidies.
A subsidy is when the government wants farms to produce more,
so they give them money to produce more output.
This would cause the supply curve to shift to the right.
A tax is just the opposite. This would take away producer's money.
And since they don't have money to produce stuff, they supply would shift to the left and decrease.
And the fifth and last shifter is future expectations.
If a producer thinks they can make more profit on their products a few weeks from now,
they'll hold back supply now and then supply more later on.
So here's a question for you: What happens to supply when price increases?
Geeze that milk!
Nothing! Remember a change in price only affects quantity supplied.
The supply is not gonna change.
Remember a change in price moves along the supply curve and a change in something else,
one of the five shifter's, will cause the actual supply curve to change.
Well that Mr. Clifford really helps me understand these economic concepts.
Alright, now we have enough information to put supply and demand together.
Over here we have the demand schedule and the demand curve
from the market we talked about in the previous video, the market for milk.
Remember demand goes to the dirt.
Right here we have the supply curve for milk that we talked about in this video.
And of course, supply goes up to the sky.
When they come together and they set the market equilibrium price and quantity,
sometimes called the market clearing price and quantity.
Three dollars is the one spot where the quantity demanded exactly equals the quantity supplied.
Again, that's equilibrium, but what if we are at disequilibrium.
What if the price was way up here at five dollars? The quantity demanded is only going to be ten gallons, right?
When the price goes up, people don't want to buy as much milk.
But when the price goes up, producers want to produce more milk,
and the quantity supplied is going to be right here at fifty gallons of milk.
The result is going to be something called a surplus.
A surplus is when the quantity supplied is greater than the quantity demanded.
And how much is the quantity of the surplus? Well, in this case, it's forty gallons of milk.
It's the fifty gallons of milk that were produced minus the ten gallons that were actually bought.
Now unless there is some kind of government involvement
or something else weird happening in this market,
the surplus is going to eventually fix itself.
If producers are producing all of this milk, but no one is buying at that high price,
what are the producers going to do?
Well, they're going to putt all of the milk on sale, they are going to lower it down to the equilibrium price.
But what if price fell even further than that, and it fell down to one dollar?
So at a low price, consumers want to buy eighty gallons of milk,
but producers don't want to produce very much, they are only going to produce ten gallons of milk.
And this creates a shortage. A shortage is when the quantity demanded is greater than the quantity supplied.
And how much is the shortage in this situation?
Well, it's seventy gallons. The quantity demanded of eighty minus the ten quantity supplied.
And again; unless something weird is happening in this market, the shortage is going to fix itself.
Now up to this point we have only talked about how a change in price will move along the demand,
or along the supply curve.
The next video is going to talk about the entire demand curve or supply curve shifting,
which will change the price and the quantity.
Make sure to check out that video and other videos explaining the supply and demand curve, alright?
Until next time!