QUANTITATIVE ECONOMICS

The quantity demanded is now 1,400 units and the quantity supplied is 800
units, so the excess demand (shortage) is 600 units.
Step 3
Calculate from the diagram total expenditure and changes in expenditure.
E.g. The total expenditure on the product before the ceiling price was $4 x 1200
units = $4,800.
The total expenditure on the product after the ceiling price was $3 x 800 units
= $2,400.
Expenditure has fallen by $2,400 or 50%.
[Remember that the expenditure of the consumers is the same as the revenue of the
producers.]
Step 4
Calculate any further effects that are requested by the question, in terms of the subsidy that
might be necessary to eliminate the excess demand created by the minimum price and the
total government expenditure on the subsidy.
E.g.
If there is an excess demand of 600 units, then the government, if they wish to rectify
this, will need to shift the supply curve to the right by 600 units at every price. This
would add 600 units to the supply function:
Originally: Q S = -400 + 400 P
Now, it would need to be: Q S1 = -400 + 600 + 400P = 200 + 400P.
As we can see from the diagram, producers will now produce at the equilibrium,
where 1,400 units are demanded and supplied at a price of $3. We can see from the
original supply curve, without the subsidy, that in order to supply 1400 units, the
producers need to receive $4.50. Thus, the subsidy per unit is $1.50.
The total subsidy payment by the government will be 1,400 x $1.50 = $2,100.
Produced by Ian Dorton & Jocelyn Blink Page 29