Government Intervention: Subsidies and Taxes

Government Intervention

• Subsidies: Government payments to producers that incentivize increased supply per unit produced.
• Taxes: Payments from firms to the government that discourage production, leading to a decrease in supply.

Basic Laws of Supply and Demand

• An increase in supply with stable demand leads to a decrease in price.
• A decrease in supply with stable demand causes a rise in price.
• If supply remains unchanged and demand increases, prices will rise.
• If supply remains unchanged and demand decreases, prices will fall.

Key Concepts

• Market Clearing Price: The equilibrium price where all produced goods are sold.
• Excess Supply: Occurs when more products are supplied than demanded at a set price, leading to a surplus.
• Excess Demand: Occurs when the demand for a product exceeds the supply at a specific price, resulting in a shortage.

Microeconomics

• Focuses on the behavior of individual units like consumers and firms, including factors such as prices and labor.

Factors of Production

• Inputs for the production of goods and services include land, labor, capital, and entrepreneurship.

Opportunity Cost

• Represents what is sacrificed to acquire a good or service, reflecting the cost of alternative choices.

Principles of Economics

• Trade-offs: Choices must be made as resources are limited; "there is no such thing as a free lunch."
• Cost Comparisons: People evaluate the costs and benefits of different courses of action.
• Marginal Thinking: Rational decision-making involves considering the additional benefit versus the additional cost of choices.
• Incentives: Responses to positive and negative incentives influence consumer and producer behavior.
• Market Efficiency: Markets typically organize economic activity well but can fail, leading governments to intervene.
• Government Role: Interventions can promote efficiency and equity, especially in cases of market failure.

Determinants of Demand

• Factors affecting demand include:
  • Buyers: Number of potential consumers influences demand.
  • Income: Household income affects spending capacity on goods and services, distinguishing between normal and inferior goods.
  • Tastes and Preferences: Consumer interests can shift demand for specific products.
  • Production Technology: Advances can enhance production efficiency, impacting supply.
  • Cost of Resources: Higher resource costs lead to decreased supply; lower costs increase it.
  • Prices of Related Commodities: Production decisions depend on profitability across different goods.
  • Expectations: Firms adjust production based on anticipated future prices.

Law of Demand

• The relationship between price and quantity demanded is inverse; as price decreases, demand increases, and vice versa.

Supply

• Supply indicates the willingness of sellers to produce and offer goods at various prices, which increases with higher prices due to profit motivation.

Law of Supply

• Stipulates that with all else equal, as price increases, quantity supplied increases, and as price decreases, quantity supplied decreases.

Producer's Point of View

• Higher prices typically lead to an increase in the quantity supplied. Decisions about current production levels are influenced by future price expectations.