The Japanese government has decided to subsidize its domestic automobile producers with stimulus money. What will this mean for the automobile market? Which curve shifts - demand or supply (or...
The Japanese government has decided to subsidize its domestic automobile producers with stimulus money. What will this mean for the automobile market? Which curve shifts - demand or supply (or both) - and in which direction? What happens to equilibrium price & quantity?
If the Japanese government decides to subsidize the Japanese car industry, it will be the supply curve for Japanese cars that will move. That curve will move outward, showing that supply is increasing. When supply increases (all other things being equal), the equilibrium quantity of cars will increase but the equilibrium price of the cars will go down.
A subsidy is one example of a non-price determinant of supply. Supply is defined as the quantity of a good that producers will be willing and able to sell at a given sale price. Producers will want to produce more goods for sale at a given price when their costs drop. Subsidies will help make the producers’ costs go down. When the Japanese government gives car companies money for each car they make, they are in effect reducing the cost of making the car. When the cost of making the car goes down, the companies will want to make more cars.
The subsidy will not affect demand. Demand is defined as the amount of a good that consumers are willing and able to buy at a given price. The consumers do not care how much it costs the producer to make the car, which means that they will not change the number of cars they are willing and able to buy just because of the subsidy.
When a supply curve moves to the right (which shows that supply is increasing), the equilibrium quantity increases as producers make more of the good. However, the price goes down (all other things being equal) because there are more goods being made.