Sri Lanka Assuming a Competitive

Sri Lanka

Assuming a competitive market, the price and quantity of rice is established strictly through supply and demand. As the price increases, producers are more likely to either produce or import rice, while consumers are more likely to decrease their consumption of rice. In this simple model, as the price of rice decreases consumers would be expected to increase consumption of rice while producers would produce or import less rice. The price and quantity of demand would be established at the equilibrium point where the price and quantity of rice is at a level that is sustainable. When one factor changes, a series of other changes occurs, bringing price and quantity back to that original equilibrium point. This is illustrated in the following diagram:

There are a number of determinants of price elasticity of demand for rice. It is important to remember that rice is a staple food in Sri Lanka. The first is the average income per capita, because people eat less rice as their incomes increase and they can afford discretionary foods. The second is the number of people, which affects the relative scarcity of rice. As supplies become scarce, people will be willing to pay more because rice is a staple. Other factors include the price and availability of substitutes. With few substitutes, the price elasticity of demand for rice will increase. For Sri Lankans, the local food culture is probably an important determinant as well. People are accustomed to rice with nearly every meal, and that impacts on the price elasticity of demand as well, minimizing it.

3. In perfect competition, the effect of the price ceiling will depend largely on where the ceiling is implemented. Under normal conditions, the ceiling will have no effect:

The price ceiling is above the equilibrium point, so there is no long-term change in the price or quantity of rice in the market. if, however, the price ceiling is set at a level lower than the equilibrium level, there will be a shortage of rice on the market:

Suppliers will be induced to violate the price ceiling because they know that there is demand in the market at a higher price point. At any point between the price ceiling and the equilibrium price the suppliers will still be able to sell rice: