Answer Happy

Consider a perfectly competitive firm that is in the long run equilibrium. There is now a fall in market demand. This will cause: (3 marks) (a) The market price to rise, which will lead to firms making supernormal profits in the short run. New firms will enter the industry, which will take customers away from the established firms and this will push the price down until firms make only normal profits in the long run. (b) The market price to fall, which will lead to firms making losses in the long run. Some firms will exit the industry, which will push the price further down until all firms make only normal profits in the short run. (c) The market price to rise, which will lead to firms making supernormal profits in the short run. New firms will enter the industry, which will push the price down until all firms make only normal profits. (d) The market price to fall, which will lead to firms making losses in the short run. Firms will exit the industry, which will push up the price until the remaining firms make normal profits.