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