Explain two factors which could shift a firm’s supply curve to the left.

Discuss the view that the provision of subsidies by the government on goods such as agricultural products will always be beneficial to stakeholders.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of supply, supply curve
• diagram to show a shift in supply to the left
• explanation of two of: increases in the costs of factors of production; increases in prices of related goods; increased indirect taxes; other factors such as: changes in regulations, objectives of the business, the weather, labour disputes, etc
• examples of factors reducing supply in practice.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definition of subsidy, stakeholders
• diagram to illustrate subsidy showing impact on market price, government spending, producer revenue
• explanation that the provision of subsidies benefits producers and consumers
• examples of subsidies on agricultural products or other goods
• synthesis and evaluation (discuss).

Discussion may include: the disadvantages of subsidies such as: opportunity cost to the government, higher taxes to fund subsidies, difficulties in removing subsidies once established, distortion of the market, creation of inefficiency, equity issues (eg some consumers and producers will benefit more than others).

The candidates that completed the highest achieving responsesto this question used supply theory to explain two factors that affect a firm’s supply curve such as: rising costs of different factors of production, indirect tax increases and supply-side shocks like poor weather conditions in agriculture. Where students focused on the rise in two resource costs such as labour and raw materials this was credited as two factors. Candidates that accessed the highest marks supported their answers with clearly labelled and annotated demand and supply diagrams along with effective real-world examples to illustrate.

Many students demonstrated a sound knowledge and understanding of subsidy theory in response to this question. Most explained clearly how subsidies affect different stakeholders from the view of benefits subsidies bring to consumers and producers. The students that accessed the higher marking criteria levels evaluated this by considering the costs subsidies represent to government. It was also good to see students discussing further impacts of subsides in agriculture by considering efficiency losses that might occur if less efficient producers were drawn into a market as well as the efficiency gains that might occur from the positive externalities that might be captured by increasing output from subsidies. The highest achieving responses considered real-world examples by, for example, looking at countries where farming subsidies have reduced the price of food for low income consumers.