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. After all long-run adjustments have occurred, we would expect total consumer spending on pasta to have:

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An increase in the price of wheat will cause an increase in the cost of producing pasta. This will lead to a decrease in the supply of pasta, which will cause an increase in the price of pasta. Since the price elasticity of demand for pasta is -1.8, we know that the percentage change in the quantity demanded is 1.8 times greater than the percentage change in price. Therefore, the increase in price will lead to a decrease in the quantity demanded of pasta.

Given that the industry is in constant cost, this means that the increase in the cost of producing pasta will lead to the exit of some firms from the market, which will cause a decrease in the supply of pasta in the long run. This decrease in supply will cause the price of pasta to rise even further.

As a result, the total consumer spending on pasta will fall. Although the higher price per unit will increase the spending of those who continue to buy pasta, the decrease in quantity purchased will lead to an overall decrease in consumer spending on pasta.

Suppose That Pasta Is Produced Under Conditions of Perfect Competition