Which statement correctly describes how short-run and long-run equilibrium behave in a perfectly competitive market?

• A. Demand determines both short-run and long-run equilibrium.
• B. Supply determines both short-run and long-run equilibrium.
• C. Short-run equilibrium is determined by both demand and supply.
• D. Short-run equilibrium is affected by demand; long-run equilibrium is influenced by both demand and supply.

Answer: (D)

In a perfectly competitive market, what changes between the short run and the long run is what can adjust. In the short run, the number of firms and the fixed inputs are set, so the supply side is basically fixed by existing capacity and costs. The price that clears the market then depends on how much buyers want at those current quantities, i.e., on demand relative to the limited supply. So the short-run equilibrium is driven largely by demand against the fixed capacity.

In the long run, firms can enter or exit in response to profits, altering the total market supply. If profits exist, more firms enter and supply increases, pushing prices down; if losses occur, firms exit and supply contracts, pushing prices up. This process continues until profits are zero, and the long-run outcome reflects adjustments from both demand (how much buyers want) and supply (the industry’s capacity shaped by entry and costs). That’s why the long-run equilibrium is influenced by both demand and supply, while the short-run equilibrium is primarily shaped by demand given fixed capacity.