Describe the impact of a close competitor lowering the price for their good has on the price and output of a firm, use a demand-supply diagram to help explain your answer.
If a competitor firm lowered the price of their good, assuming the cross price elasticity of demand (XED) for the two goods is positive, then demand will fall as consumers switch to the competitor's goods. this is shown by a shift backwards in demand from D1 to D2 in the diagram. As demand falls for the firm's goods, suppliers are producing excess supply if they continue selling at the same price (P1 on the diagram). The firm will lower their selling price (from P1 to P2) and reduce output (from Q1 to Q2) to meet the new market equilibrium.
LG
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