Final answer:
The exit of firms from a perfectly competitive market results in a shift of the supply curve and an increase in market price until remaining firms reach a zero-profit level.
Step-by-step explanation:
The exit of firms from a perfectly competitive market can lead to changes in the equilibrium market price. In the scenario where demand decreases, firms initially face economic losses as the market price falls below their average costs. As loss-making firms exit the market, the market supply curve shifts to the left, causing the market price to rise. The process continues until the market price rises to the point where the remaining firms break even—they are neither making losses nor profits. This zero-profit level is where the price equals the average total cost, and typically occurs at the point where marginal cost crosses average cost.
In the long run, the dynamics of entry and exit in a perfectly competitive market will adjust the supply such that the firms remaining in the market will earn normal profits, also referred to as zero economic profits. Therefore, the exit of firms forces up the equilibrium market price until the typical firm is at the zero-profit level.