 Hello and welcome to this session in which we'll discuss the law of supply. This session is designed specifically for CPA candidates who are studying for the exam and they will need to know certain concepts in terms of supply and demand. In the prior session, we looked at the law of demand and what we learned, if you'd like to review this, we learned that when prices go up, the quantity demanded goes down and the opposite is true. When prices go down, the quantity demanded goes up and we concluded that there's a negative relationship, inverse relationship between price and quantity. P and Q are negative related when it comes to demand. In this session, we're going to look at the law of supply and specifically we're going to look from a seller's perspective or a supplier's perspective. But let me just start with a simple example, simple question to you. If you are a seller or a supplier or a producer, what happened if the prices of your product goes up? If the prices of the product you are producing and selling went up in value, are you willing to supply, sell, produce more or less? I would say I would love it. The quantity I supply, I want to increase my quantity, now assuming I'm making a profit, obviously this is given. So if the prices go up, I'm going to supply more. What if I tell you, whatever you are selling, the price of whatever you're selling goes down? Well, I'm not as motivated anymore. The quantity that I am supplying will go down. So what do we know about the price and quantity? They are positively related. They go hand in hand. For the supply, they are positively related. For the demand, what we saw in the prior session, they are negatively related. So let's go ahead and start to look into the details of this. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead. Start your free trial today. So amount producers are willing and able to sell at any given price, given everything else is equal. So accept price. As the prices increase, as the prices go up, as a producer, as a seller, as a supplier, you want to supply more. And the opposite is true. As the prices falls, as the price falls, the quantity supplied, you will supply less. It's the same relationship between price and quantity demanded, the price and quantity demanded. So the best way to illustrate this is to show you what does it look like on a graph. Obviously, you know it's going to be positively, positive slow because they are positively related. So let's take a look at this. We are supplying cheese. Okay? And the price, when the price per pound is a dollar, you're willing to supply five pounds. So when the price is a dollar, you're willing to supply approximately five pounds. So this is, remember, the y-axis, the y-axis is the price, and the x-axis is the quantity. At two dollars, well, if the price doubled, you're willing to produce or supply 20 pounds of cheese. Well, if the price is three dollars, you're willing to supply 35 pounds. If the price is four dollars, you're willing to supply around 50. If the price is five dollars, you're willing to supply around 60. And assuming you can supply, you can supply. Now, let's draw the graph. Well, if we draw the graph, it looks something like this. What does it look like? It's an upward slope. There's a positive relationship between price. There's a positive relationship between price and quantity. And it's an upward slope. It's an upward slope. So prices, what's happening here? Prices are an incentive to the producers. As the prices goes up, you're willing to produce. Find ways to get more of your product to the market because the prices are going up. Now, at some point, now, bear in mind, at some point, the cost will rise. It means the cost to produce will rise. Then we're not talking about this, but in the short term, this is what things would look like. So just to recap what we just said, given everything else is equal, only looking at the prices. As the prices rises, you're willing to supply more. You're willing to supply more. And the opposite is true. Now, what else we have? We have a change in supply. Things that could happen that could change the quantity, the aggregate quantity supplied, something other than the price, just like we saw in the law of demand, things that could change demand and aggregate demand other than the price. We could have factors that could change the aggregate supply other than the price. So again, let's take a look at this. We are supplying now an aggregate at a dollar. We're willing to supply 1,000 pounds. And this is S1, S1 supply line 1. This is what we started with at $2,4,000 pounds. No, so on and so forth. Now, the curve, the supply curve itself, S1 could shift and become S2, which is increase in supply, or S1 could shift to the left and becomes S3, which is a decrease in supply. Now we need to study what factors would shift the supply S1 to S2 or S1 to S3, either increase supply or decrease supply. Factors other than price, other than price. Well, what could be some factors? Again, we are producing cheese. We are producing cheese. Let's assume we have a change in resource prices and input resource prices. In other words, what do you need to produce cheese? Well, mainly you need milk. You need milk. Let's assume the input prices go up. So the price of milk somehow go up. Why? Well, now it's much more expensive for the farmers to feed the cow. If it's much more expensive to feed the cow, the price of the milk goes up. If the price of the milk goes up, well, everything else, you know, if the price of the milk goes up, supply decreases for the cheese because now it's costing me more as an input. The input cost, my input cost, the cost that goes into my product went up. It's going to increase my cost. And especially that's true when you cannot pass that cost to the consumer. And the opposite is true. If it's cheaper to feed the cow, then the farmers will sell the milk at a lower cost. Lower cost means cheaper input prices. I can supply more because it's cheaper for me to supply. It will increase the supply. That's one reason. Again, change in resource prices, input resource prices, it could shift to the right or shift to the left depending on how it's going. A change in technology. Well, let's assume I have better technology to produce the output faster. Well, let's assume I found a faster, cheaper way to pasteurize milk into cheese. Well, if that's the case, faster, cheaper, I'm going to produce more. I'm going to increase my supply. I'm going to increase my supply. Even if the price is the same, even I'm still charging my consumer the same price, just because the technology changed the way I pasteurize, the way I produce the cheese, I found the faster, cheaper way, I'm going to increase my supply. If we have a change in the number of sellers in the market, well, if we have more people selling, more farmers selling cheese or less farmers, if we have more farmers selling cheese, well, if we have more farmers, there's going to be an increase in the supply of cheese. It's as simple as that. More supply. If we have less farmers, farmers are thinking that's not a good idea to produce cheese, well, the aggregate supply will go down. So we have more or less producers. This will change supply. We'll shift the supply to the right or we'll shift supply to the left. What else could affect the supply curve? A change in taxes and subsidies. If the government decided to tax the farmers, the cheese producers or tax the milk, the input that goes into the cheese, any government intervention, what's going to happen? It's going to make it costly. It's going to raise the input price because tax is a form of input because that's part of your cost. The cost of producing, well, tax is factor of it. You're increasing the cost. When you're increasing the cost, well, you're going to produce less and the opposite is true. If you make it cheaper, if you have a tax and you removed it or you give subsidies, subsidies means you're helping the farmers, you're helping the cheese producers, you're giving them some money, some incentive, some financial incentive, they will produce more. A change in prices of other goods. If there's any other substitute for cheese, well, regardless what the price of that cheese is, if there's an alternative and the change in that alternative went down, you're going to switch to the other alternative. Also a change in producer's expectation. That's very, very important, especially to be more specific, import or export policies. If government is going to encourage farmers to produce, simply put, they are going to ban import. They are going to ban import. What does that mean? It means you can no longer import by cheese from Europe. You can no longer buy French cheese. What's going to happen? The US producers of cheese will produce more because the expectation is they are going to do what? They are going to have a larger market. So they will need to produce more. The opposite is true. If the government says we are lifting any import bans or tariffs on cheese and now the French cheese, the European cheese floods the US market, well, you can't produce more. It's not worth it anymore. You're going to have a shift in the supply of cheese because you have a change in the market share. You have more cheese in the market. Therefore, if you produce more, your cheese will not sell unless obviously you reduce the price. But that's not what we're looking at. We're looking only at factors other than price. Also, if the government is going to subsidize export, help export, help export the cheese, well, there could be some legal issues there. But, you know, let's assume they're going to give some subsidies or create incentives for companies to export the cheese, then there will be an increase in supply. So it's either change in producer's expectation or government intervention, influence and import or export. What should you do now? To understand this concept better, go to Farhad Lectures and work MCQs, multiple choice questions that's going to help you do what? Understand the law of supply, law of demand, law of supply. Next thing we're going to look at those two together. You want to have a good understanding and the only way you know whether you understand this or not is by working MCQs, practicing MCQs. Remember, there will be a change along the supply curve, along the supply curve, it has to do with the prices alone. Then shift to the left or shift to the right, increase in supply or decrease in supply, shifting the whole curve. Two different things, make sure you know the difference between the two. Good luck, study hard, invest in your CPA exam and stay safe.