Demand and Supply Explained Part 2 - Macro Topic 1.5 (Micro Topic 2.2)

Summary

In this video, Mr. Clifford explains the concept of supply using milk and dairy farmers as examples. He covers the Law of Supply, which states that higher prices incentivize producers to increase output. Mr. Clifford discusses the five shifters of supply, such as the cost of inputs, number of producers, technology, government involvement, and future expectations. He also explains how supply and demand interact to determine equilibrium price and quantity, while touching on surpluses and shortages in markets. The video ends with a preview of upcoming lessons on shifting supply and demand curves.

Takeaways

• 📈 The Law of Supply states there is a direct relationship between price and quantity supplied. Higher prices incentivize producers to supply more.
• 🐄 A supply curve is upward sloping, indicating that when prices increase, the quantity supplied also increases.
• ↔️ Changes in price move along the supply curve, while other factors, such as input costs or technology, shift the entire curve.
• 💲 The five shifters of supply include: changes in input prices, number of producers, technology, government involvement, and future expectations.
• 🐮 If the price of a key resource like dairy cows increases, the supply of milk decreases.
• 🔧 New technology, like advanced milking machines, can increase productivity and shift the supply curve to the right.
• 📉 Government subsidies encourage increased production, while taxes reduce supply by decreasing producer revenue.
• 📅 Future expectations about prices can lead producers to adjust current supply in anticipation of higher profits later.
• 🔄 Surpluses occur when quantity supplied exceeds quantity demanded, often resolved by lowering prices.
• 📉 Shortages happen when quantity demanded exceeds quantity supplied, leading to higher prices to balance the market.

Q & A

What is the Law of Supply?

The Law of Supply states that there is a direct relationship between the price of a product and the quantity supplied. As the price increases, producers are willing to supply more because they want to make more profit.

How does a change in the price of milk affect the quantity supplied?

A change in the price of milk affects the quantity supplied by moving along the supply curve. When the price of milk increases, the quantity supplied increases. However, the supply curve itself does not shift with a price change.

What are the five shifters of supply?

The five shifters of supply are: 1) changes in the price of inputs/resources, 2) changes in the number of producers, 3) changes in technology, 4) government involvement (taxes or subsidies), and 5) future expectations of the producer.

How does an increase in the price of dairy cows affect the supply of milk?

An increase in the price of dairy cows, which are a key resource for producing milk, would cause the supply of milk to decrease because it becomes more expensive for dairy farmers to produce milk.

What happens to supply when there is an increase in the number of dairy farmers?

When there is an increase in the number of dairy farmers, the supply of milk increases, as more producers are entering the market and contributing to the total supply.

How does advanced technology like new milking machines affect the supply of milk?

Advanced technology, such as new milking machines, increases productivity and efficiency, leading to an increase in the supply of milk. This would shift the supply curve to the right.

What effect do subsidies and taxes have on supply?

Subsidies increase supply by providing producers with more money to produce goods, shifting the supply curve to the right. On the other hand, taxes decrease supply by taking away producers' money, shifting the supply curve to the left.

What happens to supply when a producer expects prices to be higher in the future?

If a producer expects prices to be higher in the future, they might hold back supply now to sell more later when they can make a higher profit. This reduces current supply.

What is a surplus, and how does it occur in the market for milk?

A surplus occurs when the quantity supplied is greater than the quantity demanded. In the case of milk, if the price is set too high (e.g., $5), producers will supply more milk than consumers are willing to buy, leading to excess milk on the market.

What is a shortage, and how does it happen in the milk market?

A shortage happens when the quantity demanded is greater than the quantity supplied. If the price of milk is set too low (e.g., $1), consumers will want to buy more milk than producers are willing to supply, creating a shortage.