PRINCIPLE OF MICROECONOMICS
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Subsidy is an incentive from the government to encourage producers to produce more. Beadshaw,J said “the benefit of the subsidy will be split into the producer and consumer” (2001, p.91). On the other hand, subsidy meant support, help and protection from government.
A sum of money allowed by the government or a public body to support an industry or business so that the price of a product or service may remain low or cheap. There are few disadvantages for government to be provide the subsidy.
1. Using a diagram, illustrate the effect of the removal of subsidy by the government?
According to Wikipedia “Subsidy is a form of financial assistance paid to a business or economic sector. Most of it made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor. Examples are subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production” (Wikipedia, 2011).
Indirectly, it didn’t affect the demand line but it will affect the move or shift of the supply line. It is because normally the subsidy will go to suppliers. Beadshaw,J said “the benefit of the subsidy will be split into the producer and consumer” (2001, p.91). It did not go through to consumers. For an example, Malaysia’s Government subsides the fuel; but it did not pass the subsidy to citizens. Malaysia’s Government just paid to the suppler. So, it indicates that the supply line will shift or move and the demand line did not move.
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