Suppose the market for rum can be described by the following equations: Demand: P= 10- Q,  Supply: P= Q - 4, where P is the price in US dollars per unit and Q is the quantity in thousands of units. Then: 3) suppose the government has a change of heart about the importance of rum to the public. the tax is removed and a subsidy of $1 per unit granted to rum producers. a) what will the equlibrium quantity be? b) what price will the buyer pay? c) what amount per unit (including the subsidy) will the seller recieve? d)  what will be the total cost to the government?

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Market Surplus and Shortage Analysis

In everyday language, a “surplus” indicates that there is an excess of something, while a “shortage” means that there is a scarcity of it. In economics, “market surplus” refers to the condition where the quantity of a certain good more available than what is required or “demanded” by the market. In the same way, a “market shortage” refers to the condition where the quantity of a certain good is less available than what is “demanded” by the market. If quantity in demand is written as Qd and quantity that is supplied is written as Qs, then, the condition Qs > Qd indicates market surplus and condition Qd > Qs indicates market shortage.