a. In the following graph, the drop in consumer incomes decreases market demand from D1 to D2. This lowers the market price from P1 to P2 and market output from Q1 to Q2, as the market adjusts from point a to point b. The demand curve facing each firm drops from d1 to d2. Assuming that a firm can still cover its variable costs (as shown in the left panel), it continues to operate, but at a loss. The firm’s output drops from q1 to q2 (where the new demand or marginal revenue curve intersects the marginal cost curve), and it suffers losses equal to the shaded area. In the short run, there is no change in the number of firms.