Question

4) Suppose that a market is currently in a long-run equilibrium. Using demand and supply curves, explain what will happen to this market in the short run and also in the long run if there is a decrease in demand.

Answer 1

If market is in long run equilibrium, decrease in demand will shift the aggregate demand curve from AD to AD1 while causing no change in aggregate demand in short run which reduces the price from P to P1 and reduce output level from Y to Y1.

In long run, due ot fall in demand, producers will reduce aggregate supply of goods to avoid inventories which shift supply curve to its left from AS to AS1 which will raise price again to its initial level of P while reducing output level further to Y2.