Final answer:
A permanent decrease in industry demand in a perfectly competitive market will initially cause economic losses for firms. In the long-run, firms will exit the market, causing a supply curve shift and price increase until the market returns to a zero-profit equilibrium.
Step-by-step explanation:
When operating in a perfectly competitive environment, firms that are breaking even in the long-run will experience significant impacts if there is a permanent decrease in industry demand. Initially, firms will face a drop in the market price for their product below the average cost (AC) curve, leading to economic losses. Some firms will begin producing at the new output level where P = MR = MC as long as they can cover their average variable costs, while others may need to shut down operations immediately if they cannot cover their average variable costs to minimize losses.
In the long-run, the exit of firms from the market will shift the market supply curve to the left, causing the market price to rise again. Eventually, the market will reach a new equilibrium, where firms are not making losses anymore as the price rises to the level where they are earning a zero profit again. In this scenario, the market adjusts and returns to a state where firms produce the output level where price (P) equals marginal cost (MC) and average cost (AC).
Moreover, depending on whether the industry is a constant-cost, increasing-cost, or decreasing-cost industry, the costs of production may remain stable, increase, or decrease respectively as the remaining firms in the industry adjust to the new level of reduced demand.