If market demand decreases in a market previously in long-run equilibrium,
A)the number of firms increases as each firm downsizes.
B)it is an indication that the industry has not kept up with new technology.
C)market price first rises and then falls in the movement to a new long-run equilibrium.
D)the immediate or short-run effect is a decrease in market price.
E)the industry ceases to exist.

Question

Quizplus · Accepted Answer

If market demand decreases in a market previously in long-run equilibrium, the immediate or short-run effect is a decrease in market price as firms try to maintain their market share by lowering prices to attract the reduced number of customers. This leads to a decrease in profit margins and forces some firms to exit the market in the long-run, thereby restoring equilibrium at a lower price and output level. The other options are not necessarily true for all markets and do not explain the specific effects of a decrease in market demand.

If Market Demand Decreases in a Market Previously in Long-Run