Question

2. Use supply and demand analysis to examine the following statement: “The practice of giving food stamps is self- defeating. Food stamps effectively lower the price of food. When food becomes available at lower prices, demand will increase thereby forcing the price up to its initial level.” Is this reasoning correct? Draw supply and demand curves to illustrate your answer.

Answer 1

The statement is too to a greater extent and this is because of the fact that if the food stamps are effectively reducing the price of the food what happens is that it at lower price the supply quantity will be less than that of quantity demanded so that there is a shortage created and in order to reduce the shortage what happens is that the in order to increase the quantity supplied the price must increase and if the price increases the quantity demanded decreases so that again the price was close to the equilibrium level and this is shown by the arrows and the price control in the given supply and demand diagram.