Arrange the following steps in the correct order for how a perfectly competitive dairy market reaches equilibrium: 1) Firms adjust output based on profits. 2) Market demand intersects with the supply from all firms. 3) Individual firms set prices equal to the market equilibrium price. 4) Excess supply leads to a decrease in price.

In a perfectly competitive dairy market, the process of reaching equilibrium begins when market demand intersects with the supply from all firms. This intersection determines the market equilibrium price, which is the price at which the quantity of milk demanded by consumers equals the quantity supplied by dairy farms. Once this price is established, individual firms will adjust their output based on the profits they are making; if they are earning more than their costs, they will produce more. If there is excess supply, meaning that more milk is being produced than consumers want to buy, this will lead to a decrease in price until the market reaches a new equilibrium. For example, if many dairy farms start producing too much milk, the price of milk will drop, encouraging them to reduce output until the market stabilizes.