Production quota & subsidies
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Intros
Lessons
- Production Quota & Subsidies Overview:
- Subsidies and Production Quotas
- Two ways of government intervention
- Definition of Production Quota
- Definition of Subsidy
- Effects from Production Quotas
- Decrease in Supply
- Increase in price
- Underproduction
- Incentive to cheat and overproduce
- Effects from Subsidies
- Increase in supply
- Fall in price
- Increase in quantity produced
- Overproduction
Examples
Lessons
- Understanding Effects of Production Quotas
You are given the following information
Price (dollars per chair)
Quantity demanded (per chair)
Quantity supplied (per chair)
30
200
50
40
175
100
50
150
150
60
125
200
70
100
250
Graph the following information, and calculate the price, marginal cost, and quantity produced for chairs if the government sets a production quota of 125 chairs. - You are given the following information
Price (dollars per cup)
Quantity demanded (per cup)
Quantity supplied (per cup)
5
10
4
10
8
8
15
6
12
20
4
16
25
2
20
Graph the following information, and calculate the price, marginal cost, and quantity produced for cups if the government sets a production quota of 12 cups. - Understanding Effects of Subsidies
You are given the following information
Price (dollars per bag)
Quantity demanded (per bag)
Quantity supplied (per bag)
30
25
10.0
40
20
12.5
50
15
15.0
60
10
17.5
70
5
20.0
Graph the following information, and calculate the price, marginal cost, and quantity produced for chairs if the government gives a subsidy of $30 per bag. - You are given the following information
Price (dollars per pack)
Quantity demanded (per pack)
Quantity supplied (per pack)
9
22
4
18
19
10
27
16
16
36
13
22
45
10
28
Graph the following information, and calculate the price, marginal cost, and quantity produced for chairs if the government gives a subsidy of $18 per bag.
Topic Notes
Production Quota & Subsidies
There are two more ways for the government to intervene in products.
Production Quota: government sets a limit to the quantity of a good that may be produced in a specified time.
Subsidy: Payment made by the government, given to the producer.
Effects from Production Quotas
Looking at the graph, we can see that production quotas does the following things:
- Decrease the quantity (supply)
- Increase in price
- Decrease in marginal cost
- Underproduction
- Increases the incentive to cheat (produce more than the quota)
Effects from Subsidies
When subsidies are given to producer, they would want to producer more. So, the supply curve shifts to the right.
Looking at the graph, we see that subsidies does the following things:
- Increases the supply (curve shifts to the right)
- Decrease the price
- Increase in quantity produced
- Increase in marginal cost
- Overproduction
Note: Producers are willing to produce more (even though it sells for less) because of the subsidy that the government gives.
Subsidies are not efficient because it gives deadweight loss.
