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Mar18-10, 11:10 PM
Sci Advisor
Matterwave's Avatar
P: 2,820
So, if you subsidize consumers, then in effect at every price P, they only "see" a price P-S where S is the subsidy (assuming a per-unit subsidy).

So, let's just say the price is $10 and the subsidy is $5. The consumer then only sees the price as $5 and will buy however many he demanded at $5. This is shown through a shifting out of the demand curve. This means, that, in general (if we assume downward sloping demand), the consumer demands more at a given price P. The seller can then maximize profits to reflect such an increased demand. The general rule is then higher sales and higher prices.

The supply curve shouldn't shift since the subsidy is applied to consumers.

So you have the same supply curve, and a shifted demand curve. The new intersection of which is the equilibrium.