Question

Suppose government offers a subsidy to laptop sellers. Say whether each group of people gains or loses from this policy. [LO 6.4\(]\) a. Laptop buyers. b. Laptop sellers. c. Desktop computer sellers (assuming that they are different from laptop manufacturers). d. Desktop computer buyers.

Short answer

a. Gain b. Gain c. Lose d. Gain

Step-by-step solution

Identifying the Effect of Subsidy on Laptop Buyers

Since the government offers a subsidy to laptop sellers, they are likely to reduce the prices of laptops to attract more buyers. As a result, laptop buyers tend to gain from this policy because they can purchase laptops at a lower price than before.

Identifying the Effect of Subsidy on Laptop Sellers

Laptop sellers benefit directly from the government subsidy as it reduces their costs, allowing them to either sell more laptops at lower prices or maintain prices and increase their profit margins. This results in a gain for laptop sellers.

Identifying the Effect of Subsidy on Desktop Computer Sellers

Desktop computer sellers may lose out due to the subsidy on laptops. As the price of laptops falls, the demand for desktops may decrease since some consumers might substitute buying laptops for desktops. This leads to a potential loss for desktop computer sellers.

Identifying the Effect of Subsidy on Desktop Computer Buyers

Desktop computer buyers may experience a benefit indirectly. As the demand for laptops increases due to lower prices, desktop computer sellers might lower their own prices to remain competitive. Consequently, desktop buyers could gain through reduced desktop prices.

Key concepts

Consumer Behavior

Consumer behavior refers to the decisions and actions that influence individuals as they purchase goods and services. In the context of a subsidy on laptops, consumer behavior is vital to understanding how different groups will react to price changes. When the government grants a subsidy to laptop sellers, it typically results in a decrease in the retail price of laptops. As prices fall, demand from consumers usually increases, assuming that all other factors remain constant.

• Increased Affordability: With prices reduced, laptops become more affordable, attracting more buyers who might not have been able to purchase at previous price levels.
• Shifts in Demand: Consumers who were previously indifferent between owning a laptop or not may now decide to buy due to better pricing.
• Substitution Effect: Some consumers who planned to purchase desktop computers might switch to laptops as they are now cheaper, altering consumer patterns in technology products.

In summary, subsidies impact consumer behavior by altering perceived value and accessibility, prompting shifts in demand and purchasing preferences.

Market Equilibrium

Market equilibrium is a state in which the quantity of a good supplied is equal to the quantity demanded at a particular price level. When the government intervenes by subsidizing a product, it can disrupt this balance. In the case of laptops, the subsidy implies that sellers can lower their prices due to reduced costs, which shifts the supply curve to the right. This change leads to a new equilibrium position, characterized by higher quantities sold at lower market prices.

• Price Influence: As the price drops due to subsidy-induced supply shifts, more consumers enter the market, increasing demand.
• Quantity Adjustments: The new equilibrium point reflects a higher quantity of laptops being sold than before the subsidy was introduced.

This alteration in market dynamics demonstrates how subsidies can effectively change both price levels and product availability, achieving policy goals such as broader access to technology.

Substitute Goods

Substitute goods are products that can replace each other based on consumer preferences and price changes. In this scenario, laptops and desktop computers are viewed as substitute goods because they serve similar purposes, though varied in form and functionality. When a subsidy lowers laptop prices, the consumer decision-making process comes into play.

• Price Sensitivity: Some consumers who initially considered buying desktops might switch to laptops due to the attractive new pricing.
• Demand Shifts: This shift results in reduced demand for desktops as laptops become a more enticing option.

Ultimately, the substitution effect is a core factor in how consumer preferences evolve in response to price changes across similar product categories, influencing market shares and competition between substitute goods.

Government Intervention in Markets

Government intervention in markets involves regulations or policies that aim to influence economic outcomes. Subsidies are a common form of this intervention, designed to stimulate demand, support industries, or achieve social policy objectives. In the case of laptops, the subsidy reduces business costs and stimulates an increase in supply, demonstrating government strategy in influencing technological adoption and economic stimulation.

• Regulatory Impact: Lower operational costs for businesses lead to enhanced competitiveness and increased market participation.
• Broader Objectives: Beyond mere price reduction, subsidies can help achieve goals like increased educational access to technology and economic growth.

While beneficial in certain sectors, government interventions must be balanced to avoid market distortions and unintended negative outcomes, such as suppressed competition or dependency on subsidies.