Final answer:
In a perfectly competitive market, a reduction in production costs due to new technology initially increases competition, attracting more firms. However, wage increases can lead to fewer firms and decreased competition. In the long run, the market reaches equilibrium with zero economic profits.
Step-by-step explanation:
With a technological improvement that brings about a reduction in costs of production, an adjustment process will take place in the market. The technological improvement will result in an increase in supply curves, by individual firms and at the market level. The existing firms will experience higher profits for a while, which will attract other firms into the market. This entry process will stop whenever the market supply increases enough (both by existing and new firms) so profits are driven back to zero.
When wages increase, costs of production increase. Some firms would now be making economic losses and would shut down. The supply curve then starts shifting to the left, pushing the market price up. This leads to fewer firms in the market, reducing competition.
Therefore, in a perfectly competitive market, a reduction in production costs due to new technology would initially increase competition and attract more firms. However, wage increases can lead to a decrease in competition as some firms may shut down due to economic losses. In the long run, the market will reach equilibrium with zero economic profits and prices will be determined by supply and demand.