Question

Suppose that the market for solar panels is perfectly competitive and is currently in a state of long run equilibrium, and that this is a decreasing-cost industry. If demand for solar panels falls, will the new long run equilibrium price be higher, lower, or the same as before, and why?

Answer 1

The new long run price will be higher than before

it is given that the industry is a decreasing cost industry which implies that expansion in the industry will result in lowering the price of resources available for new firms. In another way, contraction in the industry implies that those existing firms will now bear a greater cost of production. Now if we imagine that the demand is declining in this industry then in the short run price will decrease which will bring economic losses to the existing firms. In the long run as some of these firms start leaving the market, market supply curve will be shifting to the left, raising the price above its long run value because of downward sloping long run aggregate supply curve.