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Hello this question came across on my homework. Here's what I know so far. I know the answer is false, but given we need to produce two graphs I am confused on how to represent my knowledge in two graphs. I will attach my graphs to this post. Basically in one EV supply and demand graph which shows that when the government subsidizes them it drives demand up shifting curve right, intersecting the curve at a higher price. My second graph shows that when the EV market prices increase the non-EV markets decrease. My confusion is that if the government subsidizes the price why does it increase? S and D graph for EV

Supply and Demand curve NON-EV

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  • $\begingroup$ To head confusion the lines in red D1 or S1 are the lines AFTER subsidization and top graph is EVs bottom graph is NON-EVS $\endgroup$
    – jl2005
    Oct 5, 2023 at 14:57

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A couple of things:

  1. In a competitive market, the supply curve of a good is based on the marginal cost of producing that good, so there will be no shift in the supply curve.
  2. Think about where the demand curve comes from: the aggregated demand schedules of all consumers. A subsidy means that every consumer's individual demand is increased at each price point. Aggregate this up, and it's equivalent to the demand curve shifting right, as you have represented. This means that Qd = Qs at a higher price, and the price increases.
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  • $\begingroup$ so then are my graphs correct in the sense that they answer the question? $\endgroup$
    – jl2005
    Oct 5, 2023 at 15:19
  • $\begingroup$ Also, does the supply curve for Non-EV not change because fewer people demand them therefore they will supply less? $\endgroup$
    – jl2005
    Oct 5, 2023 at 15:27
  • $\begingroup$ This causes a change in quantity supplied, which is the point where the demand curve and supply curve intersect determining the price. However, since nothing has changed about the costs of producing non EV's the supply itself curve doesn't shift. Make sure that you're clear on the difference between supply (the supply curve) and quantity supplied (a particular price point on the supply curve). $\endgroup$
    – A. Miller
    Oct 5, 2023 at 17:44
  • $\begingroup$ For the non-EV figure, in the short run, the demand curve should shift left since the two types of cars are substitutes, and supply should be unchanged. $\endgroup$
    – A. Miller
    Oct 5, 2023 at 17:47
  • $\begingroup$ Oh ok so the price only drops since the demand curve shifts left therefor intersecting the supply curve at a lower price point $\endgroup$
    – jl2005
    Oct 5, 2023 at 18:11

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