Answer
When there is an increase in market demand, the firm would now see an increase in the average revenue curve (which is equal to marginal revenue due to it being horizontal), since the equilibrium price increases from P0 to P1, and purely competitive firms are price takers. This would cause a disruption in the long run equilibrium as now firms earn super normal profits of the shaded area.
To restore this long run equilibrium, the market would now be saturated with more firm that enter, causing supply to increase, and thus equilibrium price to decrease, and in the long run this would be result in normal profits being made, as the price returns to P0=AR0=MR0=Dd0.
Work Step by Step
When there is an decrease in market demand, the firm would now see a decrease in the average revenue curve (which is equal to marginal revenue due to it being horizontal), since the equilibrium price decreases from P0 to P1, and purely competitive firms are price takers. This would cause a disruption in the long run equilibrium as now firms earn subnormal profits (or make losses) of the shaded area.
To restore this long run equilibrium, the market would now see firm that leave, causing supply to decrease (supply curve shifts leftward), and thus equilibrium price to decrease, and in the long run this would be result in normal profits being made, as the price returns to P0=AR0=MR0=Dd0.
