Sol :
If there are two goods Gasoline and ethanol.
And , if ethaonal goods is subsidised, then the following impact
will happen in the market of the both the goods :
Market for Ethanol |
Market for Gasoline |
- As, product get subsidy , whih means that cost of the producer
is less than before subsidy. This will tends tthe producer to
produce more ethanol than before.
- So, increase in supply will shift the supply curve to the
right.
- Rightward shift in the supply curve will cretae a sitiation of
excess supply in the market.
- Excess supply will lower the prices of the product as new
equilibrium is cretaed at lower prices and higher quantity .
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- Gasoline is the substitue of the ethanol , so when the prices
of the ethanol decreases , demand for gasoline decreases
- As , consumer prefer to buy more ethanol than gasoline.
- So , decrease in demand means shift of demand curve to the
left.
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