question_answer

Define 'Market-supply'. What is the effect on the supply of a good when government imposes a tax on the production of that good? Explain.

Or

What is a supply schedule? What is the effect on the supply of a good when government gives a subsidy on the production of that good? Explain.

 

Answer:

Market supply refers to the total of quantities supplied by all the firms in the market at different price levels. When the government imposes a tax on the production of a good then this implies that the cost of production also rises. Consequently, the firm will supply same quantity at the higher price. The diagrammatic presentation of the effect on the supply of a good when government imposes a tax on production of the good is as follows:
In the diagramme, SS is the original supply curve and the firm is ready to sell OQ quantity of the good at OP price. Now it the government imposes a unit tax of Rs ?K? per unit of output, then this will raise the cost of production as the firm needs to pay an extra amount of Rs ?K? each unit of the output supplied. Consequently, the cost curve will shift leftward (upwards) to\[{{S}_{1}}{{S}_{1}}\] from SS. The magnitude of the shift in the cost curve is equal to Rs K?. This leftward shift in the supply curve shows that the firm now intends to charge higher price, i.e., OP + K instead of OP to supply OQ Quantity of commodity due to imposition of tax.
Or
Supply schedule is a tabular presentation representing different quantities of a commodity offered for sale corresponding to the different prices at which these quantities are offered for sale. The following table represents a supply schedule.
Price Rs.	Quantity (in units)
1	5
2	10
3	15
4	20
5	25
The diagrammatic presentation of the effect on the supply given a subsidy on the production of that good is as follows:
In the diagramme, SS is the supply curve and the firm is ready to sell OQ quantity of the good at OP price. Now if the government provides subsidy of? ?V per unit of output, then this reduces the cost of production. This results in the rightward shift of the supply curve from SS to\[{{S}_{1}}{{S}_{1}}\]. Hence the firm can supply the same quantity of commodity at lower price, i.e., earlier the firm was supplying OQ quantity of good at OP price. After the provision of subsidy, the firm will supply the same quantity at OP-V price. The magnitude of the shift in the cost curves is equal to Rs V.