Subsidy diagram help (1 Viewer)

[DrDawn]

So I need help with finding government expenditure on the subsidy scheme in this market, I know it is size of the subsidy x quantity which is $4 x 400 = $1600, but our teacher gave us a question that why do we multiply it by 400 and why not by the difference between 400 and 300 (so 100). I know it's 400 but I don't know the reasoning behind it, could anyone explain why?

 

[laterz laterz]

okay so think about this
subsidies are meant for every business who is going to produce the product right?
like the government is not gonna give subsidies to only 1/4th of the producers
if they give subsidies, they need to give it to every business who produces the product - equity, equality whatever
do you get what i mean?

 

[DrDawn]

okay so think about this
subsidies are meant for every business who is going to produce the product right?
like the government is not gonna give subsidies to only 1/4th of the producers
if they give subsidies, they need to give it to every business who produces the product - equity, equality whatever
do you get what i mean?

Sorta, but what do you mean by 1/4th of producers? Isn't it the quantity we're looking at...

 

[fnsndgfg]

Because the subsidy is being applied to all 400 units, not just the additional ones. E.g if Australian banana farmers supply 300 bananas and they are given a subsidy allowing the price of Australian banana drops from $14 to $10 (expensive banana's ik). They now are more competitive and can sell 400 bananas. This is because all 400 bananas are $4 cheaper, not just the 100 extra.

 

[GoldenMelon]

At the subsidised price the total demand is now 400, which means the government needs to subsidise all 400 units of the product, not just the difference.

 

[laterz laterz]

Sorta, but what do you mean by 1/4th of producers? Isn't it the quantity we're looking at...

yeah so basically 1/4th of the production but that wouldn't make sense coz you can't give subsidies to the goods right, you will give it to the producers

 

[DrDawn]

I think I kinda get it, so because an increase in the supply curve indicates the entry of new firms, if the government subsidises only 100 then that will apply to those new firms only rather than the whole domestic industry. Is that why..?

 

[laterz laterz]

I think I kinda get it, so because an increase in the supply curve indicates the entry of new firms, if the government subsidises only 100 then that will apply to those new firms only rather than the whole domestic industry. Is that why..?

uh what

 

[laterz laterz]

lmaooo, ok so that's wrong

so lets take this step by step:
- the production is low right now and the government wants more to be produced
- they give out subsidies to all the producers producing that product or any new producers that might produce this product
- once these subsidies are paid, its cheaper for businesses to produce more right? so the supply before was 300 and now its 400. but subsidies are being paid for every product right and not just the extra 100?

does this make a bit more sense? i didnt get this at first as well in year 11. its kinda hard to put it in words.

 

[GoldenMelon]

lmaooo, ok so that's wrong

Okay, a subsidy means that the product is now cheaper to produce and hence purchase, which has led to an increase in demand from 300 to 400, yes? But since the government is subsidising production costs, the government must now account for this increase in demand and subsidise all 400 units of this product produced.