Suppose that pasta is produced under conditions of perfect competition and that the constant-cost industry is initially in long-run equilibrium. Now suppose there is an increase in the price of wheat, which is a key ingredient in producing pasta. Further assume that the price elasticity of demand for pasta is -1.8. In the short run, we would expect to see:

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An increase in the price of wheat would increase the cost of production for pasta manufacturers. In the short run, firms cannot adjust their production processes to reduce costs, so they would have to pass on the increased cost of production to consumers in the form of higher prices. Given the price elasticity of demand for pasta is -1.8, this would cause a greater-than-proportional decline in the quantity demanded of pasta, leading to a decrease in total revenue for producers. With revenue decreasing and costs increasing, most firms in the industry would earn negative economic profits.

Suppose That Pasta Is Produced Under Conditions of Perfect Competition