Im new to economics please assist on the questions below about subsidies: 1-why the demand curve stays constant? 2-why producer recieving more than the equilib. Price? 3-and consumer paying less? Note that if the supply curve shifts right and the demand curve stays constant the eqilib. Price will be less Please explain in plain english. thx
A subsidy is a government payment to a supplier. It reduces the supplier’s cost, but doesn’t affect the demand curve.
The supplier receives the price of the good/service from the consumer, plus the subsidy from the government.
The reduction in the supplier’s cost moves the supply curve to the right (or down, depending on how you look at it; it amounts to the same thing). The new equilibrium quantity is higher than the equilibrium quantity without the subsidy, and the new equilibrium price is lower than the equilibrium price without the subsidy.
If you draw supply and demand curves you should be able to see this one quite easily. Draw an upward-sloping supply curve and a downward sloping demand curve: the intersection point gives you the equilibrium quantity (horizontal axis) and price (vertical axis). Now draw a new supply curve parallel to the old one, but lower; the (vertical) difference is the amount of the subsidy. You’ll see that the new intersection point (between the new supply curve and the demand curve) is lower and to the right of the old intersection point: higher quantity, lower price.
To answer your questions
1, The demand curve is constant because the producer receives the subsidy and produces more as a consequence. If the customer received the money they would demand more and the demand curve would shift.
2 and 3. Because of the subsidy the producer is willing to produce more this shifts the supply curve to the right and pushes price down. The consumer pays less due to over supply but the producer receives a higher price in total due to the subsidy (producer receives new equilibrium price plus the subsidy)