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 it as an increase in the input cost like we already discussed, right? So, as an increased cost, when a tax goes up, 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 the opposite here, 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, supply is going to increase as well. This results in a directly proportional relationship, right. So, this is a good thing for supply when the government is giving us money.

Here are some examples of taxes and subsidies effects. How about school funding? The government gives a lot of money to universities and public schools. If the funding increases, then we're going to see the supply of public education increase as well. A very common place you see subsidies is in the agricultural business. Often, the government will subsidize farmers because they want to ensure that there is enough food for the citizens. So, you'll see that agricultural subsidies are 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.