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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