Final answer:
In response to a decrease in demand, the price and quantity in a competitive market both fall as the market adjusts to return to long run equilibrium, where firms produce at the minimum of their long-run average cost curves and only make normal profits. Option A is the correct answer.
Step-by-step explanation:
When a market experiences a decrease in demand and returns to long run equilibrium, the net changes that occur can be understood by examining supply and demand dynamics. In the long run, firms in a competitive market can enter or exit freely, and they do so as economic profits or losses are made.
A reduction in demand leads to a downward pressure on prices since consumers are willing to purchase less at each price level. In response, less efficient firms with higher costs cannot cover their average costs and are prompted to exit the market.
In the long run competitive equilibrium, the remaining firms are typically those that can produce at the minimum of their long-run average cost curves (LRAC). The market supply, thus, adjusts to the decreased demand—fewer firms or reduced output per firm—causing the market to reach a new equilibrium where the firms only make normal profits (zero economic profit). Consequently, the market price falls, and the total quantity supplied also falls because there is less demand to meet and fewer firms operating.
Therefore, the correct answer to what happens to the market price and quantity after a decrease in demand and the market returns to long run equilibrium is A. price falls and quantity falls.