Suppose there is a perfectly competitive market where free entry and exit of firms are allowed. Market is in equilibrium where Price is equal to minimum Average Cost. Due to sudden leftward shift in demand curve, the equilibrium number of firms will___________.

Decrease

The correct answer is option 2: Decrease

• In a perfectly competitive market, firms operate at the minimum average cost in the long-run equilibrium where price equals average cost (P = AC).
• If the demand curve shifts leftward, it means that demand has decreased, leading to a fall in the equilibrium price.

Impact on Firms:

1. Since price falls below the minimum average cost, firms start incurring losses.
2. Firms that cannot sustain losses will exit the market.
3. As firms exit, market supply decreases, which may eventually restore the equilibrium price.
4. The new equilibrium will have fewer firms than before.

Conclusion: Since some firms will exit the market due to losses, the equilibrium number of firms will decrease.