The Effect of an Increase in Demand in the Short Run and the Long Run in a Decreasing-Cost IndustryIn a decreasing-cost industry, an increase in demand leads to a higher price in the short run and a lower price in the long run. Suppose demand increases from D1 to D2 as shown in panel (b). This raises the market price from $40,000 to $49,000. Existing firms increase their output, and industry output expands along the short-run industry supply curve, S1, to a short-run equilibrium at YMKT. Economic profit attracts new entrants in the long run, shifting the short-run industry supply curve rightward and lowering the market price. Meanwhile, industry expansion lowers the cost of inputs and shifts the firms’ cost curves downward as shown in panel (c). This continues until the falling equilibrium price catches up to the falling minimum of average total cost. As shown in panel (b), that occurs at equilibrium point ZMKT with a price of $36,000 and an industry output of QZ. Assuming that the lower input cost decreases the cost of making each unit by the same amount, the firms’ cost curves shift straight down. In the long run, an existing firm moves from Y to Z in panel (c), returning to its initial output level and earning zero economic profit. The downward-sloping line passing through XMKT and ZMKT, labeled LRS, is the long-run industry supply curve.