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Economics Commentary - Microeconomics - Coggle Diagram
Economics Commentary - Microeconomics
Basic Info
Title: India faces record fertiliser subsidy in 2021/2022
Source: Reuters
Date published: December 1st 2021
Date accessed: December 12th 2021.
Word Count: 800
Section of syllabus: Microeconomics
Economic Key concepts: Intervention and Choice
Plan
Explain what has happened in the article with definitions
Give a diagram for DAP and the effect of the subsidy. Explain it verbally
Give a diagram for the crops and explain the effect of subsidy given to fertilisers
Then analyse the effects. Give advantages and disadvantages. Think outside the textbook
Weigh the advantages and disadvantages, hence reach a conclusion about whether you agree with the action or not. Justify whichever side you take
1.
Urea and DAP prices have been increasing. This is because of the increase in prices of fuels (coal and natural gas) used to produce them and trade restrictions by China and Russia
Therefore, it is becoming more and more expensive to produce and import fertilisers and India has a large agriculture sector hence heavily relies on the supply of fertilisers. This will drop the supply of fertilisers in India
This would lead to the farmers not being able to produce enough supply of crops leading to a shortage in the market as food prices increase
This is socially and economically undesirable hence the government intervened with a subsidy to fix this. The government also sent supplies to local producers to help them switch production
With the decrease in the supply of fertilizers, the price of fertilisers will increase. This will cause the cost of production to increase for farmers.
2.
Draw a market diagram and label demand curve, D = MPB = MSB and supply curve as S=MPC.
Draw a second supply curve below the first one, labelling it MSC
There are external benefits associated with the production of fertilisers in that it helps the economy keep food prices low. Hence there is positive production externality.
Label the distance between the two as external benefit and show supply shifting from MPC to MSC but not quite there. Hence the quantity increases from Qm and moves closer to Qopt and the price drops from Pm and moves closer to P opt
In short, the subsidy is helping achieve allocative efficiency
Show the decreased welfare loss, hence the subsidy is helping
Explain all this diagrammatically and verbally
3.
Draw a market diagram for crops with a demand and supply curve. Label them MB and MC respectively.
Draw a second supply curve above the original one. This is where the farmers would be producing without the fertilisers.
As the fertiliser subsidy is given, the price of fertilisers would decrease. This would reduce the farmers cost of production causing the second supply curve to shift and meet the original
This causes the quantity to increase and the prices to fall. Hence the government action has led to the control in food prices
Explain this diagrammatically and verbally
Advantages
Disadvantages