Question

Suppose the government gives subsidy to companies that produce beef, and at the same time, it gives families living below the poverty line food stamp to buy beef. What would be the effect of these two policies on the price and quantity of beef sold in the marketplace? Explain your answer using your knowledge of demand and supply.

Answer 1

When the government gives subsidy to companies that produce beef, firms' effective cost of producing beef lowers. So, they increase beef production at all price levels. As a result, the supply curve of beef shifts towards the right.

When the government gives families living below the poverty line food stamp to buy beef, the demand for beef would also increase at all price levels. So, the demand curve would shift towards the right.

Since both the demand and the supply curve shifts towards the right, the equilibrium quantity will increase i.e. more quantity of beef would be bought and sold in the market. However, we cannot predict the movement of the price. If the increase in supply is higher than the increase in demand, the price will fall. However, if the increase in demand is higher than the increase in supply, the price will go up.