Question

Suppose the market for rice is perfectly competitive. What effect will the widespread popularity of quinoa (as a replacement for rice) have on the rice market in the short run and the long run? Illustrate with two carefully labeled graphs showing the effects at both the market level and the firm level **the price axes on the two graphs should be linked with each other.*

Answer 1

Rice market is perfectly competitive market and hence firms are price takers. Quinoa is a replacement ( substitute) for rice. Widespread popularity of Quinoa will decrease demand for rice and hence as demand for Quinoa shifts to right, the prices for rice will go down from P1 to P2 . In the short run, firms which are able to cover average variable cost will survive but in the long run firms will go out of market.

Decreasing supply (shift from S1 to S2) will take price levels up from P1 to P3 in the long run but this effect depends on the level of substitutability. It may happen that prices will remain low for rice in the long run if rice is not preferred.