a rise in the subsidy leads to a fall in the costs and fall in the prices of the product what is the effect of this on demand and supply ?
Answers
The effect of a subsidy is to shift the supply curve downward by the amount of the subsidy. Ps' represents the price received by the producers, which is the price paid by consumers plus the subsidy. The impact of the subsidy is to lower prices for consumers but to increase the price received by producers.
When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services. This increases the overall supply of that good or service, which increases the quantity demanded of that good or service and lowers the overall price of the good or service.
The effect of a specific per unit subsidy is to shift the supply curve vertically downwards by the amount of the subsidy. In this case the new supply curve will be parallel to the original. Depending on elasticity of demand, the effect is to reduce price and increase output.