Calculating Subsidies

Unit 4 - Lesson 6
Learning outcome
● Calculate the effects of subsidies on markets and stakeholders. (AO4)
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Consumer Expenditure

● Total amount of money spent by the

consumer in the market.

No Subsidy Subsidy

Consumer Pe X Qe Pc X Q1
Expenditure

Change in Consumer Expenditure equals:

Consumer Expenditure (no subsidy) minus

Consumer Expenditure (subsidy)
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Producer Revenue

● The amount of money firms make from

selling a certain amount of output.

No Subsidy Subsidy Inc/Dec

Producer Pe X Qe Pp X Q1 Increases
Revenue

To calculate the change in producer

revenue:

Producer Revenue (no subsidy) minus

Producer Revenue (subsidy)
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Government Expenditure:

● Amount of money the government

spends to provide the subsidy.
● The opportunity cost of spending that
money in other sectors of the economy.

Cost of Subsidy

Government Expenditure (Pp - Pc) X Q1

Calculate the effects of subsidies on markets and stakeholders. (AO4)

Consumer Surplus

● Additional benefit a consumer receives for

paying a price lower than they were willing
to pay.
● Located above the price the consumer
pays and below the demand curve.

No subsidy Subsidy Inc/Dec

CS A+B A+B+D+E+F Increase

CS (P-int Demand (P-int Demand Increase

minus Pe) X Qe minus Pc) X Q1
divided by 2 divided by 2
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Change in Consumer Surplus

● Change in consumer surplus is equal to

the consumer gain (D + E + F)
● Consumer surplus (subsidy) minus
consumer surplus (no subsidy)

No subsidy Subsidy Inc/Dec

CS A+B A+B+D+E+F Increase

CS (P-int Demand (P-int Demand Increase

minus Pe) X Qe minus Pc) X Q1
divided by 2 divided by 2
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Consumer Surplus

● Additional benefit a producer receives for

paying a price lower than they were willing
to pay.
● Located below the price the producer
receives and above the supply curve.

No subsidy Subsidy Inc/Dec

PS D+H B+C+D+H Increase

PS (Pe minus P-int (Pp minus P-int Increase

Supply ) X Qe Demand) X Q1
divided by 2 divided by 2
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Change in Producer Surplus

● Change in producer surplus is equal to

the producer gain (B + C)
● Consumer surplus (subsidy) minus
consumer surplus (no subsidy)

No subsidy Subsidy Inc/Dec

PS D+H B+C+D+H Increase

PS (Pe minus P-int (Pp minus P-int Increase

Supply ) X Qe Demand) X Q1
divided by 2 divided by 2
Calculate the effects of subsidies on markets and stakeholders. (AO4)

Total Welfare Loss

● Amount of consumer and producer surplus

lost in the market due to the market not
being allocatively efficient.
● Calculated by the area of the triangle “G”

Subsidy

TWL (Pp minus Pc) X (Q1 minus Qe) divided by 2