Petrol remains affordable because it is subsidized by the government. Using an appropriate diagram, illustrate and explain the effect of subsidy on...

I've made a diagram and I'll explain it, but you should also make sure you can replicate it yourself. Get used to these supply-and-demand diagrams, because you're going to keep seeing them. They are everywhere in economics.

I'm not sure it's really true that petrol is affordable primarily due to subsidies; subsidies haven't increased that much lately but oil prices have been plummeting. But okay, subsidies do make petrol cheaper, so it's at least in part the reason why it's still affordable.

Why do subsidies make things cheaper? It's basically the same reason that taxes make things more expensive, but in reverse. A subsidy drives a wedge between the buyer's price and the seller's price, because the buyer does not have to pay the subsidy (at least not directly---maybe through taxes or whatever) but the seller still receives it.

Take a look at my diagram. I've set up the supply (red) and demand (blue) curves, so that the competitive equilibrium would be at a price of $6 per gallon and the quantity sold would be 4 million gallons. This is represented by the green lines that intersect where the supply and demand curves intersect.

Now I introduce a subsidy of $2 per gallon; the result is represented by the orange lines. The new buyer price is on the demand curve, the new seller price is on the supply curve, and the gap between them is equal to the amount of the subsidy. The quantity sold now is greater than it would have been in the absence of the subsidy. In this case, the new buyer price is $5 per gallon and the new seller price is $7 per gallon---notice how they differ by $2, the subsidy. The new quantity sold is 5 million gallons.

You can also use this diagram to figure out how much the government will have to pay; it's the entire orange rectangle, which is 5 million gallons times $2 per gallon, so $10 million.