Question

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur

a. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.
b. Market price will be above its original level.
c. Existing firms will reduce output in the short run.
d. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.

Answer 1

Answer: c. Existing firms will reduce output in the short run.

Step-by-step explanation:

Should Suppliers experience a drop in demand for their products then because they are in a Long Run Equilibrium, they will reduce output in the Short run.

The simply explanation is that there will be less people to buy the goods of the suppliers. Rather than make a loss then they will reduce their output which will reduce their Marginal Cost whilst also selling what they can till the economy adjusts itself.

An example is the recent OPEC agreement to cut supply of oil. Due to the Corona Pandemic, oil demand has fallen to a new low as planes are grounded, cars are not moving with Nationwide lockdowns and the like. This prompted OPEC to reduce the Quantity of oil they produce in a given period.