In the short run, a decrease in the market demand will cause a perfectly competitive firm to production ______and _______ .

Question

Quizplus · Accepted Answer

In a perfectly competitive market, a decrease in demand will result in a surplus of goods, and therefore a decrease in the market price. The firm, being a price taker, will have to lower its price to sell its output, resulting in a decrease in the firm's revenue. If the decrease in demand is significant enough, the firm's revenue may not cover its variable costs, resulting in economic losses. Thus, a decrease in market demand will cause a perfectly competitive firm to decrease production and incur economic losses.

In the Short Run, a Decrease in the Market Demand