1.2.9 Subsidies Flashcards
What is a subsidy ?
It is a sum of money granted by the government to a firm to keep the price of a g/s low and to increase supply of that g/s.
What happens to the supply curve when a subsidy is given ?
Supply curve will shift vertically down.
What will producers be willing to do after a subsidy is granted by the government ?
They will lower prices as well as increase their supply
If a government introduces a £400 subsidy for electric cars and the original price equilibrium is £6000 what is the new price the producers will sell the cars for ? And why ?
The new price would be £5800. This is because if the suppliers drop their price to £5600 they will gain no benefit as the £400 benefit will be cancelled out by the £400 drop in price. Therefore, price will settle at £5800 so producers can keep some of the benefit and make more sales.
What are the gains for consumers when a subsidy is in place and in this case £400 subsidy being sold at an equilibrium of £6000 with 100 units ?
They will save £200 on each unit and in total will save £20 000.
What is the benefit to the producer when the subsidy is in place in this case being £400 subsidy with their original equilibrium being £6000 sold at 100 units ?
The producers will gain £200 per 100 unit after the subsidy as they sell their food for £6000 and gain £200 from the subsidy. In total producers will gain £20 000.
How do you work out the total cost of the subsidy to the government ?
The size of the subsidy times by the quantity sold.
How is the size of the subsidy represented ?
It is represented by the vertical distance between our supply curves.
What does the bottom half of the total subsidy represent ?
The benefit of the subsidy toward the consumers
What does the top half of the total subsidy represent ?
The benefit of the subsidy towards the producers
How do you draw the total cost of the subsidy to government and how to draw the producer and consumer benefit ?
To draw the TC you have to start from the new equilibrium point and go upwards till it touches the supply curve which is the size of the subsidy and go left from there to the end which is the quantity being sold at.
To find the producer and consumer benefit you extend the original equilibrium to the right.
