Economics – The interaction of demand and supply | e-Consult

Diagram: A standard demand and supply diagram should be drawn. The supply curve should shift to the right, reflecting the reduced cost of production due to the subsidy. Label the original equilibrium point as E1 (price P1, quantity Q1) and the new equilibrium point as E2 (price P2, quantity Q2). The subsidy will lower the price consumers pay and increase the quantity consumed. It will also increase the price producers receive and increase the quantity supplied.

Explanation of Impact: The subsidy effectively lowers the cost of production for wheat farmers. This leads to an increase in the supply of wheat, shifting the supply curve to the right. This rightward shift results in a new equilibrium where the equilibrium price is lower (P2 Q1).

Effects on Consumers: Consumers benefit from a lower price for wheat, increasing their purchasing power. This is a positive outcome for consumers.

Effects on Producers: Producers benefit from a higher price for wheat, increasing their profits. This is also a positive outcome for producers. The increased quantity demanded will also lead to increased demand for labour and other inputs in the wheat industry.

Potential Drawbacks: The subsidy is funded by taxpayers, so there is a cost to the government. There may also be unintended consequences, such as overproduction of wheat leading to surpluses.