Assume that the economy has two sectors, milk and orange juice, and that both sectors are initially in long-run competitive equilibrium. Milk and orange juice are substitute goods

Trace the effects of a change in preferences that increases the demand for orange juice.

If the demand for orange juice increases, there will be an increase in profits in the short run for firms producing orange juice. This will attract additional resources to orange juice until in the long run firms in this sector are again earning a normal profit. The higher demand for orange juice will lead to a lower demand for milk. This will decrease the profits in the short run, causing firms to leave this sector. This frees up resources to be used in the orange juice sector. Firms will continue to leave milk until all the remaining firms are just making a normal return.