increase in production subsidies will shift

Step 1: Analyze the question The question asks what happens on a supply-and-demand diagram when the government increases subsidies given to producers.

Step 2: The concept A production subsidy is a payment from the government to producers. It lowers their cost of production. When costs fall, producers can supply more at every price, or the same quantity at a lower price. This is a change in a determinant of supply (like technology, input prices, taxes, and subsidies), so the whole supply curve shifts.

• Lower costs or subsidies increase supply, so the supply curve shifts right (outward).
• Higher costs or taxes decrease supply, so the supply curve shifts left (inward).

Step 3: Apply it to the options

• A. The demand curve moves left. Wrong, because a production subsidy affects producers, not consumers' demand directly.
• B. The supply curve moves right. Correct. Lower production costs mean more is supplied at each price.
• C. Both curves move left. Wrong, because supply increases and demand is not directly affected.
• D. Supply moves left and demand moves right. Wrong, because the direction of supply is the opposite of what a subsidy causes.

Step 4: Result The subsidy shifts the supply curve to the right. This usually leads to a lower equilibrium price and a higher equilibrium quantity.

Exam tip: Remember "Subsidy = Supply increases = curve shifts Right." Subsidies and cost reductions go right, while taxes and cost increases go left. Also, demand shifts are caused by things like income, taste, and prices of related goods, not by producer subsidies.