Now let's see how taxes and subsidies can affect the supply of a good. So let's start with taxes. When we think about taxes from the business standpoint, it's just another cost, right? So we could almost think of this as an increase in the input cost like we already discussed, right? So it's an increased cost, tax is going up, and supply will decrease, right. It's like our costs are going up, so we are going to supply less. They have that inversely proportional relationship. And on the opposite side, subsidies are basically like a reverse tax; that's why, instead of paying the government money, the government gives you money. So when subsidies increase, then the supply is going to increase as well. So here we have a directly proportional relationship, right. So this is a good thing. The government's giving us money. It's a good thing for supply.

Here are some examples of some taxes and subsidies to consider. How about school funding? The government gives a lot of money to universities and public schools. What if the funding increases? Then we're going to see the supply of public education increase as well. And a very common place you see subsidies is in the agricultural business. A lot of times the government will subsidize farmers because they want to make sure that there is food for the citizens. So you'll see that there are agricultural subsidies, given quite often. You can imagine that if a subsidy increases or if a new subsidy arises in the industry, you're going to see supply increase as well. Cool. So let's go ahead and do an example.