Explain the effect of a subsidy on equilibrium price and quantity in a demand and supply model.

If the government offer a subsidy to firms, this will reduce their per unit cost of production. This will shift supply downwards, as for a given market price, the firm is willing to produce more. This will reduce the prices in equilibrium and increase the quantity produced. The distance between the two curves is the value of the subsidy. The magnitude of the change in price and quantity will depend on the elasticity of demand. If demand is relatively price elastic, then an introduction of a subsidy will cause a relatively large increase in quantity but a relatively small decrease in price. However, if the demand is price inelastic, the change in price will be relatively large compared to the change in quantity.

AR
Answered by Anna R. Economics tutor

17476 Views

See similar Economics GCSE tutors

Related Economics GCSE answers

All answers ▸

What is excess supply?


Analyse how an increase in wages could cause inflation.


What is the price elasticity of demand ?


Explain one possible effect on the equilibrium market price of an increase in production costs for firms


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning