In early 2014, China decided to cancel the 1.2 million ton...

In early 2014, China decided to cancel the 1.2 million ton rice import contract with Thailand. ${ }^{64}$ Using demand and supply analysis, answer the following questions with supporting graphs. a. What will be the effect of the cancellation of the import contract on the equilibrium price and quantity of rice in Thailand? b. What will be the effect of the cancellation of the import contract on the equilibrium price and quantity of rice in China? c. If China increases the import of rice from Vietnam in order to stabilize the domestic price of rice, how will it affect the equilibrium price and quantity of rice in Vietnam? d. Suppose the Vietnamese rice producers have built the storehouses and expect the increasing demand for rice from China will keep pushing the price up in the future. How would you expect the current equilibrium price and quantity of rice in Vietnam to change, compared to those before China increases the import of rice from Vietnam?

In early 2014, China decided to cancel the 1.2 million ton rice import contract with Thailand. ${ }^{64}$ Using demand and supply analysis, answer the following questions with supporting graphs.
a. What will be the effect of the cancellation of the import contract on the equilibrium price and quantity of rice in Thailand? b. What will be the effect of the cancellation of the import contract on the equilibrium price and quantity of rice in China?
c. If China increases the import of rice from Vietnam in order to stabilize the domestic price of rice, how will it affect the equilibrium price and quantity of rice in Vietnam?
d. Suppose the Vietnamese rice producers have built the storehouses and expect the increasing demand for rice from China will keep pushing the price up in the future. How would you expect the current equilibrium price and quantity of rice in Vietnam to change, compared to those before China increases the import of rice from Vietnam?

Key Concepts

Demand and Supply Analysis

This concept involves the use of demand and supply curves to determine the market equilibrium, that is, the intersection where the quantity demanded equals the quantity supplied at a given price. It is fundamental for understanding how external factors, such as policy changes or contractual cancellations, shift these curves and alter equilibrium outcomes in any market.

Shifts in Demand and Supply Curves

Shifts occur when external factors influence the quantity demanded or supplied at every price level. For instance, the cancellation of an import contract or a sudden increase in demand from another country can cause the supply or demand curves to shift rightward or leftward, leading to higher or lower equilibrium prices and quantities.

Market Equilibrium

Market equilibrium is the point where market supply equals market demand. It is essential in analyzing how a change—whether a policy action, market shock, or shift in international trade—affects both the price and quantity traded in a market. Understanding how equilibrium adjusts helps predict market responses to changes in both domestic and international market conditions.

Impact of Trade Policies on Domestic Markets

Changes in trade policies, such as cancellation of import contracts, affect domestic supply and demand dynamics by altering the availability of a good in the market. This concept explains how such policy decisions can lead to shifts in equilibrium price and quantity not only in the exporting country but also in the importing country, as seen in the changes in rice markets in both Thailand and China.

Trade Diversion

Trade diversion occurs when an import source is replaced by an alternative supplier due to changes in trade agreements or policies. This concept is crucial for understanding how shifting import patterns, such as China's increased rice imports from Vietnam after cancelling its contract with Thailand, influence the domestic markets of alternative supplying countries.

Market Expectations and Speculative Behavior

This concept explains how the anticipation of future price changes can influence current market behavior, such as producers holding back supply in expectation of higher prices. This behavior can lead to current adjustments in both price and quantity, as market participants react to their expectations, thereby affecting the equilibrium even before actual changes occur in demand or supply fundamentals.

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