Question

What is a supply schedule? What is the effect on the supply of a good when Government gives a subsidy on the production of that good? Explain.

 

 

Answer 1

Supply schedule is a tabular presentation representing different quantities of a commodity offered for sale corresponding to the different prices at which these quantities are offered for sale. The following table presents a supply schedule. 

Price (in Rs)	Quantity (in units)
1	5
2	10
3	15
4	20
5	25

The diagrammatic presentation of the effect on the supply gives a subsidy on the production of that good is as follows. 

Suppose that a firm is facing price of OP₁. In the diagram, LAC₁ and LMC₁ are the long run average cost curve and long run marginal cost curve respectively. In the lower panel we represent the supply curve. Now, suppose unit subsidy is given by the government equal to Rs ‘v’ per unit of output. This will result in a reduction in the cost of production. As a result, the cost curves shifts rightwards (downwards) to LMC₂ and LAC_2. The magnitude of the shift in the cost curves is equal to Rs v. Now, as the supply curve is a rising part of LMC, so the supply curve in the figure (ii) also shifts rightwards from S₁ to S₂. This implies that the firm will now supply greater units of output.