Question

How does subsidy influence the supply of a good by a firm? Explain.

Answer 1

Changes in subsidies

When the government provides a subsidy to the producer of goods, there will be an increase in the supply of goods. This is possible because the cost of production decreases and it leads to an increase in profit. The supply curve S shifts leftwards from S₁ to S₂. It leads to an increase in the supply of good from OQ₁ to OQ₂, where the price remains constant at OP₁.