The rice prices have increased by 70% since last year. This trend has been accel

Question

The rice prices have increased by 70% since last year. This trend has been accelerated in recent weeks and several parts of the world have already experienced food riots and protests over these price increases. Several rice producing countries have imposed limitation on rice export and even retailers in the United States have limited the quantity of rice each customer can buy. Increase in population, and draught in some rice producing areas are mentioned as contributing factors in this crisis. Assume that the rice market is a perfectly free market and was in its long run equilibrium prior to these events. Comment on what will happen in the rice market in the short and long run?

Explanation / Answer

In the short run, due to adverse impact on the rice production, the prices would rise further and the quantity supply would be not change and the demand would keep rising due to the shortage of rice.

In the long run, more farmers would start farming rice, instead of other food grains, because rice giving them good returns. There is no barrier in the market, there is free entry and exit and the rice producers have homogeneous goods due to which they would not be able to affect the prices and be the price takers. As a result, gradually, more rice production would match the increased the demand and the qouta imposed would be removed, other countries would also be willing to supply rice and hence the price would stabalise and equalise all over and the equilibrium would be established again.

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