Unit 1: Subsidies

• Subsidy meaning


  Money grant to firms by the gov to reduce costs of production and encourage an increase in output
• What effect do subsidies have on consumers?

  Prices fall, increase in consumer surplus, higher quantity and choices of goods, higher affordability. Long run concern on how its being funded and whether it impacts them negatively.
• What is the effect of subsidies on producers?

  Increase in producer revenue, increase in producer surplus, higher employment.
• What effect do subsidies have on the government?

  Solves market failure, increases/improves affordability. Worried about the long-run concern and opportunity cost of its funding.
• Why are subsidies implemented in an economy?

  To solve market failure and increase affordability of goods
• What effect do subsidies have on the supply curve?

  It shifts to the right/ downwards
• What effect do subsidies have on price and quantity?

  Price decreases and quantity increases
• How is gov. cost calculated?

  (P3-P2) X Q2/// A+ B/// Go to new equilibrium, workout the vertical distance between the supply curves X Q2
• Where is producer revenue located?


  Top portion of incidence area
• Where are consumer savings located?

  Below portion of the incidence area
• Diagram: Subsidy p/unit


  Vertical distance between supply curves.
• Diagram: Consumer incidence


  P2
• Diagram: Producer Incidence


  P3
• Diagram: Gov revenue


  P3P2 TIMES Q2
• Applying a subsidy to an inelastic product

  Is ineffective to increase production, because there's a small expansion of demand when price drops. Consumers will always need these products thus, a change in price won't motivate more consumption.
• Applying a subsidy to an elastic product

  Effective, because there's an increase in demand expansion when price drops. These are luxury goods that consumers want more of when they are cheap.