When a firm is in a constant-cost industry, a decrease in demand will result in economic _____ (losses or profits)

When a firm is in a constant-cost industry, a decrease in demand will result in economic losses. This will cause exit from the industry, resulting in a decrease in supply over time. This long-run adjustment will eventually cause the price level to increase so that it eventually returns to the level that is was before the demand shift. There will be firms fewer firms in the industry. The long-run industry supply curve will be horizontal.

• This paragraph describes a perfectly-competitive market.
• In these markets, profits always get driven to zero in the long-run. Additionally, because all firms are competing with each other and because there are a large number of producers relative to the market size, all firms must operate at the minimum of their average cost.
• Assuming the market was already in long-run equilibrium, all firms were originally earning zero economic profits. So when demand decreased, the price fell, causing the firms to incur a loss.
• Because firms were now incurring a loss, some would exit the market. This would cause the number of suppliers to decrease, resulting in a decrease in the supply curve.
• The resulting new equilibrium would be at a lower quantity, but a higher price.
• This would continue until enough firms exited the market to cause the price to rise to the original price, which was equal to the minimum of the long-run average cost for all firms.
• Because price would always return to this price, the long-run average cost curve would be horizontal at the minimum of the average cost curve.