A reduction in variable costs causes a shift downward in both MC and ATC. Because MC is the firm's supply curve and since industry supply is the sum of individual firm supplies, the industry curve shifts to S2, and market price drops to P2.

   Firms must adjust output so that MC = P2. Firm output increases to Q2 on the firm graph; and because individual firms are producing more, industry output rises as well, to Q2 on the industry graph.

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