Question

Explain in words what will happen to the output and price of a decreasing-cost industry if there is a fall in market demand.

Answer 1

A decreasing cost industry is one where supply increases more than the demand and therefore price decrease. Economies of scale also play a role in decreasing the cost. But when the demand for a decreasing cost industry starts to fall for whatever reason, the price will fall dramatically. New price equilibrium will go down owing to an increase in supply and a decrease in market demand. Price may go down so much that businesses will sell their produce at loss to avoid storing cost or the cost of their product getting spoiled with time. If demand fall is temporary like the current Coronavirus pandemic, the industries will just wait till it's over and resumes afterward, some may even go bankrupt. But if the fall is permanent or for unknown reasons, industries will exit the market and output will decrease and because of that price will go up a bit and stop at the equilibrium price.

( Although it is not required, these graphs will help you understand this. The first graph shows the increase in supply and a decrease in demand, the second graph shows a decrease in supply as businesses exit the firm)