The Effects of Increasing Demand on Olive Oil Price in the Short and Long Run

What happens to the price of olive oil when demand increases in the short run and long run?

Will the price increase or decrease initially? How does it change over time?

Answer:

In a constant-cost, perfectly competitive industry, if the demand for olive oil increases, the price of olive oil will initially increase in the short run, but decrease in the long run.

When the demand for olive oil increases in a constant-cost, perfectly competitive industry, the price of olive oil undergoes changes in the short run and long run due to the dynamics of supply and demand.

Short Run: Initially, the price of olive oil will increase. This is because the demand increase is not immediately met with a corresponding increase in supply. As a result, existing firms in the industry continue to produce at the current price, and some firms may begin to make economic profits due to the imbalance between demand and supply.

Long Run: However, over time, the entry of new firms into the industry will increase the supply of olive oil. As the supply increases to meet the heightened demand, the price of olive oil will start to decrease. This downward pressure on price continues until it reaches the zero-profit level, where economic profits are no longer being made by firms in the industry. Therefore, in the long run, the price of olive oil ultimately decreases as the industry adjusts to the increased demand through supply expansion.