APPLICATION OF DEMAND THEORY

SUBSIDIES IN CASH OR KIND

Presented by:
MOHIT RAJ
PGP 08
20081030
SUBSIDY and its NEED
A grant paid by a government to an enterprise
that benefits the public
Subsidies are provided to alleviate poverty
and improve the welfare level of consumers
Consumer Demand Theory is used to
determine the Utility maximization of
consumers and based on their preferences
subsidy is provided
EXAMPLES

A poor man can be given a direct income

subsidy or an equivalent amount of
commodity subsidy.

Income subsidy : Unemployment allowance

or Welfare payments

Commodity subsidy : Food, Shelter, etc.

Ex : VISIT TO HEALTH CLUB
A company requires its executives to have
access to health clubs
Market price per visit is Rs 120 and Number
of visits per executive is limited to 10 per
month

Options available to the company:

a. Reimburse the executives
b. Subsidize to the extent of Rs 100 per visit
c. Pay executives a total of Rs 1200 in lump
sum
Types of Executives:

a. Normal Preference for visits

b. Stronger Preference for visits
c. Stronger Preference against visits
Executive’s Money Balances a. Reimburse the visits
b. Subsidy of Rs 100
c. Pay Rs 1200 in lump sum
G

E1. No Preference
(3) E2. Strong Preference for visits
3c E3. Strong Preference against visits
A
M 3a
E3 3b

(1)
1a, 1b, 1c
E1
(2)
2b
2a, 2c
E2

O B D F
Number of visits