Chapter 6, Problem 1FT

Subpart (a):

To determine

The impact of subsidy on the resources.

Explanation of Solution

The market is a structure where there are buyers and sellers who sell and the exchange of goods and services between the buyers and sellers. The price is determined by the interaction of the demand and supply in the market.  The goods and services are produced using the factors of production. The main resources are the labor, machineries as well as the bank lending which helps the firm to convert the inputs into the finished final goods and services for the consumption.

When the government provides the subsidies, it reduces the cost of production of the firm and as a result of the minimized cost of production, the firm would be able to earn a higher level of profit in the economy. When a firm enjoys the profit, it would attract the resources towards it. Thus, it can be concluded that when the government subsidizes an activity, the resources such as the labor, machinery, and the bank lending will tend to gravitate towards the activity that is subsidized and tend to gravitate away from the activity that is not subsidized.

Economics Concept Introduction

Concept introduction:

Resources of production: The resources of production are the labor, machines, raw materials, and so on, which are necessary to transform the inputs into the finished goods and services.

Subsidy: Subsidies are the sum of money granted by the government to the needy firms or individuals to meet the expenses of the firm or the individual in order to keep the price of the good or service lower.

Subpart (b):

To determine

The impact of subsidy on the resources.

Explanation of Solution

The market is a structure where there are buyers and sellers who sell and the exchange of goods and services between the buyers and sellers. The price is determined by the interaction of the demand and supply in the market.  The goods and services are produced using the factors of production. The main resources are the labor, machineries as well as the bank lending which helps the firm to convert the inputs into the finished final goods and services for the consumption.

The tax is a compulsory and unilateral payment made by the people towards the government which acts as the major source of revenue to the government. There are different types of taxes such as the income tax, property tax, professional tax, and so on. When the government taxes a commodity, it would reduce the revenue received from the sale of the commodity and as a result, the profit generated from the sale of the commodity would fall. The resources such as the labor, machinery and the bank lending tend to be attracted towards the profit which means, when the government taxes a commodity, the resources would tend to gravitate away from the commodity that is taxed and to gravitate towards the commodity that is not taxed.

Economics Concept Introduction

Concept introduction:

Resources of production: The resources of production are the labor, machines, raw materials, and so on, which are necessary to transform the inputs into the finished goods and services.

Subsidy: Subsidies are the sum of money granted by the government to the needy firms or individuals to meet the expenses of the firm or the individual in order to keep the price of the good or service lower.