Final answer:
An increase in demand in a long-run competitive equilibrium market leads to a rise in equilibrium output, as firms increase production to capture higher profits. Eventually, new entrants will drive profits back down to zero, achieving a new long-run equilibrium.
Step-by-step explanation:
When an increase in demand occurs in a market in long run competitive equilibrium, one effect is that the equilibrium output rises. Initially, firms in the market will benefit from the increased demand and higher market price, leading them to ramp up production to maximize profits. However, the attraction of positive economic profits will eventually lead to new firms entering the market, which will increase overall supply. Over time, the entry of new firms will drive down the price and profits will normalize, returning to zero in the long run as the market reaches a new equilibrium. In the long run, firms in perfectly competitive markets will react to profits by increasing production, and to losses by reducing production or exiting the market. Ultimately, a long-run equilibrium is attained when economic profits are zero, meaning no new firms want to enter and existing firms do not want to leave the market.