Suppose a competitive industry faces a decrease in demand (i.e. the demand curve shifts to the...

Suppose a competitive industry faces a decrease in demand (i.e. the demand curve shifts to the left). What are the steps, in the short-run and then in the longrun, in which a competitive market ensures increased output?

Expert Solution

In a competitive market when demand decreases and the demand curve shifts to the left, the prices also decreases for the goods and services as there will be many competitors in the market. When the price decreases the production will go up and the industry will be in a position to produce more goods and services. Therefore, the output increases in short run as the price comes down and with the additional amount the firm will be able to increase the overall output.

In a compettive market when demand decreases and the demand curve shifts to the left, the output also decreases in the long run. When the demand decreases, initially, there will be losses faced by the firms as the output decreases. But gradually over time there will be new firms coming into the market in the long run. Then the new firms in order to make profits will start producing goods and services and in this way in long run there will be more firms in the competitive markets and the output will increase.

Rahul Sunny answered 2 years ago

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