In this part, we're going to consider changes
in supply and demand which really underlie
a lot of the price changes that we actually
see out there in the real world.
So, first, let's start with changes in supply.
Here, in order to maintain our focus, we need
to remember what we're focusing on is a change
in quantity for us to get the direction of
the shift in supply.
So, the question we're answering is: even
if the price doesn't change for the good,
what are things that would change our willingness
to provide the good.
Now, if sellers become more willing to supply
the good at any particular price, then we'd
say that supply increases.
Another way of saying that is the supply curve
shifts to the right, which we'll see in a
minute graphically.
On the other hand, if sellers become less
willing to supply the good, even at exactly
the same price as before, then we'd say that
supply decreases, or the supply curve shifts
to the left.
Now, an important point here is to remember
that the price of the good itself will not
change the supply of the good.
The supply, after all, is a relationship between
prices for the good and the quantity that
is offered for sale.
Now, graphically, shifts in supply look something
like this.
So, here we have a standard supply curve that
I've labeled S1.
You see it's upward sloping.
That is, higher prices are associated with
higher quantities being offered for sale.
Now, let's suppose something changes in the
market so that our sellers are less willing
to provide the good.
In that case, we'd say that supply decreases,
or shifts to the left.
So, here, as you can see by the blue arrow,
even at exactly the same price, that is, if
we stay at the same vertical level, we have
a smaller quantity being supplied.
That shows that the relationship between prices
and quantities have changed.
On the other hand, we could have an increase
where at exactly the same price, we could
end up with more being offered for sale.
This, once again, shows that that relationship
has changed - or that supply had changed.
In this case, supply has increased, or shifted
to the right.
Now let's turn to factors that result in these
kinds of shifts.
The first is any change in input prices.
Now, an input is just something used to make
something else.
So, for example, suppose that the price of
wood increases, what would that do to the
supply of wooden bookshelves?
Well, here, we need to think about it from
the suppliers' perspective.
If the cost of me producing the thing goes
up, then it makes sense it's going to be less
profitable for me to do it.
That being the case, I'm not going to produce
as much as I did before.
So, we say the supply decreases - that is,
it shifts to the left.
Now, this just shows the general principle
that if we have higher input prices, they
will tend to decrease the supply of those
goods that use that particular input.
On the other hand, if we have lower input
prices, then we have an increased supply.
It becomes more profitable to provide the
thing, so we become willing to provide more
of it - or more suppliers enter the market.
Another factor that can shift supply is prices
of goods that are related in production.
So, here we have in mind two possibilities.
One is that two goods are what we call substitutes
in production.
Two goods are substitutes in in production
if producing more of one requires that we
then produce less of the other.
This is typically the case if they use, say,
a lot of the same set of resources.
For example, you might look at something like
leather shoes and leather jackets.
Both of them require the use of leather.
So, sensibly, if I'm going to produce more
leather shoes, I must, by necessity, produce
fewer leather jackets.
Which then means that these goods are going
to be tied together in their markets.
So, say we have an increase in the price of
leather shoes.
In that case, as a producer, it makes more
sense for me to produce leather shoes.
As a result, we have less leather left over
to produce jackets.
Or we have a decrease in the supply of jackets.
Another possibility, though, is that goods
may relate to each other as being complements.
We'd say that two goods are complements in
production if producing more of one results
in producing more of the other.
Here it really helps to think of by-products,
where if you produce more of one thing, you
just happen to end up with more of the other.
My favorite example here would be leather
and beef.
When you slaughter cattle you end up both
with the hide that can be tanned into leather
and also the meat that you can eat as beef.
These two tend to be produced together.
If you produce more of one, you end up with
more of the other.
In this case, if we have an increase in the
price of leather, we'd actually have an increase
in the supply of beef.
Reasoning through it: if there's an increase
in the price of leather, it makes sense for
us to slaughter more cattle.
But, if we slaughter more cattle, we end up
with more beef as a result, even if the price
of beef didn't change.
So, an increase in the supply of beef.
Another factor that can shift supply is expectations
regarding future prices.
So, here I can imagine what happens if we
expect higher prices in the future.
Now, as a seller, if I expect the price of
my good is going to go way up in the future,
I certainly don't want to sell it now.
I'll hold onto it and wait until the future
to sell it.
So, that being the case, there's a decrease
in current supply.
As we are shifting when we want to provide
things from now until later.
So, right now, we see a decrease in supply.
Another thing that can change supply is the
number of suppliers.
So, here we can imagine if more suppliers
enter the market.
Well, naturally, this is going to lead to
a greater supply in the market, or an increase
in supply.
Naturally, we can also reverse this.
If there are fewer suppliers in the market,
say, firms shut down or go bankrupt, then
we'd have a decrease in supply.
Another one is what we call technology.
Now technology I have here in mind not, say,
the invention of consumer electronics and
the like - iPads and personal computers and
what have you - but rather technology that
is used in production to make it more efficient.
So, if we have better productive technology,
that is, we find ways to produce the same
stuff more cheaply, that would tend to increase
supply for exactly the same reason that we
saw, say, when the price of inputs decreases.
If it gets cheaper for us to produce something,
we tend to produce more of it.
One last one is environmental conditions or
we could call it the state of nature.
This is something that as a big impact in
some markets but not others, particularly
agriculture is going to be affected by this
quite a bit.
If you have a drought, you're going to have
a very different supply from your crops than
you would if, say, you have perfect conditions
in terms of rain.
So, beneficial conditions, you'd tend to see
an increase in supply.
If we have detrimental conditions, we tend
to see a decrease in supply.
Now, one point that I'll make is that environmental
conditions don't just mean weather, but also
include things like natural disasters and
the like that can affect our ability to supply
goods.
