Answer to Question #257440 in Macroeconomics for shern

Question

Suppose you are the manager of a chain of fitness centres. You have just learned that the Government has passed a new law to further enhance healthy lifestyle among the youths. The legislation provides increased subsidies gym operators, as well as tax breaks for parents who spend up till RM1,000 on their children’s gym membership fees. As a result of this legislation, what do you predict will happen to the equilibrium price and quantity of gym membership? Why?

Answer 1

The equilibrium is the point at which two points in a graph intersect. This is the point where the demand curve (D) and the supply curve (S) intersect in a competitive market. The quantity demanded and the quantity supplied amounts intersect at the equilibrium price. The equilibrium quantity is the mutually enjoyed amount for both the producers and the suppliers. For any price demanded that does not equal the supplied quantity, the market is not in equilibrium. When the government provides subsidies for gym operators, then the cost of operating gyms is lowered. Therefore, the costs will not be transferred to consumers. Simultaneously, the tax breaks on parents who spend upwards of RM1000 only mean that more children will get enrolled at the gym. Therefore, the quantity of gym membership increases. 

When the quantity of gym membership increases and the costs of operating the gym is lowered, the supply curve shifts to the right; Subsidy at work. This, therefore, ends up lowering the market's equilibrium price.