Question

Describe the process by which a perfectly competitive industry moves from one long run equilibrium to another after a one time decrease in demand.

Answer 1

We know that long run supply curve is horizontal in a perfectly competitive market. Thus, a decrease in demand will mean a decrease in quantity in the long run but there will be no change in the price, thus the quantity will decrease.

The process is that in the short run, the price will fall and the output will also diminish as a result of the decrease in demand. Now, some firms will exit because they are incurring losses, so the price will stabilize to the previous one in the long run.