(a) The equilibrium price and quantity are where the demand and supply curves intersect. From the table, the equilibrium price is £1.50 and the equilibrium quantity is 100 kg.

(b) A change in consumer income leading to an increase in demand shifts the demand curve to the right. This results in a new equilibrium point where the price is higher and the quantity is also higher.

The diagram would show a shift in the demand curve to the right, intersecting the existing supply curve at a new, higher point. The new equilibrium would have a higher price and a higher quantity.

(c)

• Consumer Surplus: An increase in demand leads to a higher equilibrium price and quantity. Consumers are willing to pay more and the quantity they buy increases, resulting in a larger consumer surplus.
• Producer Surplus: An increase in demand leads to a higher equilibrium price and quantity. Producers receive a higher price for their goods, resulting in a larger producer surplus.

Therefore, the change in consumer income increases both consumer and producer surplus.

Price Elasticity of Demand: Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Elastic demand means a large change in quantity demanded for a small change in price; inelastic demand means a small change in quantity demanded for a large change in price.

Relationship to Producer Surplus: The relationship is indirect but important. Generally, inelastic demand is beneficial for producers. If demand is inelastic, producers can increase prices without significantly reducing quantity demanded, leading to a larger producer surplus. Conversely, elastic demand is detrimental to producer surplus because any price increase will lead to a large decrease in quantity demanded, reducing producer revenue.

Government Intervention & Price Elasticity: The optimal level of government intervention depends on the price elasticity of demand.

• Inelastic Demand: In a market with inelastic demand, government interventions like price ceilings are less likely to be beneficial and may even be harmful (leading to shortages). Price floors might be more appropriate to support producers.
• Elastic Demand: In a market with elastic demand, price ceilings might be considered to protect consumers, but they could significantly reduce producer surplus. Government subsidies might be more effective in supporting producers.

Example: The Pharmaceutical Industry: Consider a life-saving drug with inelastic demand. Patients with a need for the drug are unlikely to reduce their consumption significantly even if the price increases. In this case, a price floor might be implemented to ensure that pharmaceutical companies can still make a profit and continue to produce the drug. However, a price ceiling would likely lead to a shortage, as producers would be unwilling to supply enough of the drug at a lower price. This illustrates how the elasticity of demand influences the effectiveness of different government interventions.

Effect on Supply Curve & Equilibrium: A subsidy effectively lowers the cost of production for farmers. This causes the supply curve to shift to the right (or upwards). The new equilibrium will have a higher quantity of wheat supplied and a lower equilibrium price.

Diagrammatic Illustration:

Impact on Producer Surplus: The subsidy increases producer surplus. The area of the producer surplus triangle widens because the supply curve shifts right, leading to a higher price and quantity. The new producer surplus is the area above the new supply curve and below the new equilibrium price.

Efficiency of Subsidies: Subsidies are not always the most efficient way to support an industry. They can lead to:

• Deadweight Loss: Subsidies can distort market signals, leading to overproduction and a deadweight loss (loss of economic efficiency).
• Inefficient Allocation of Resources: Subsidies may encourage the production of goods that are not socially optimal.
• Administrative Costs: Implementing and administering subsidy schemes can be costly.