Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the most likely results of a decrease in market demand?
A)Some existing firms will produce more while some other firms will exit the market so that the market supply curve will remain the same.
B)Existing firms will produce less and some firms will exit the market so that the market supply curve will shift to the left.
C)Existing firms will produce more and new firms will enter the market so that the market supply curve will shift to the right.
D)Existing firms will produce less while new firms will enter the market so that the effect on the market supply curve is uncertain.
E)Nothing will change in the market.

Question

Quizplus · Accepted Answer

A decrease in market demand will lead to a surplus of goods, causing prices to fall. This will result in some firms exiting the market as they find it unprofitable to continue producing at the lower prices. The remaining firms will likely reduce their production in response to lower demand. As a result, the market supply curve will shift to the left. This is because fewer firms are producing at a lower quantity level than before, causing a reduction in the quantity supplied at each price level. Option B is therefore the most likely result.

Suppose That a Competitive Market Is Initially in Long-Run Equilibrium