Final answer:
In a perfectly competitive market with an increase in costs, firms may initially decrease output in the short run. Some may exit the market if they are unable to cover costs, leading to higher market prices and allowing remaining firms to possibly increase output. In the long run, market adjustments will lead to a zero-profit equilibrium with no incentive for entry or exit.
Step-by-step explanation:
When a perfectly competitive market is in competitive equilibrium and there is an increase in costs, the response from firms will depend on whether we're considering the short run or long run. In the short run, individual firms may decrease their quantity (q) supplied due to the higher costs making some of their output unprofitable. If the cost increase is industry-wide and significant enough, some firms (especially those with higher costs) may incur losses and decide to exit the market. This reduction in supply may push up prices, making it profitable again for the remaining firms to increase their output back to the equilibrium level or even higher if the market price rises above their average cost.
In the long run, if firms in the market are experiencing economic losses due to increased costs, the market mechanism will lead to some firms exiting. The decreased supply will cause the market price to rise until it reaches a point where firms just cover their costs including a normal profit, known as the zero-profit point. This is the point where the marginal cost curve crosses the minimum point of the average cost curve. No new firms will enter because there are no longer economic profits to be had, and existing firms will not want to exit as long as they can cover their costs.