Is oligopoly elastic or inelastic?
Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.
Do oligopolies have perfectly elastic demand curve?
A monopoly has a perfectly elastic demand curve. “Price wars” can often exist when monopolistic competitors compete over price. Monopolistic producers will operate at a higher point on the ATC curve than the minimum due to barriers to entry. In the long-run, there is no economic profit in pure competition.
Which model of oligopoly uses kinked demand curve?
The kinked demand curve of oligopoly was developed by Paul M. Sweezy in 1939. Instead of laying emphasis on price-output determination, the model explains the behavior of oligopolistic organizations.
What is kinked demand curve theory?
The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
What will happen in the kinked demand curve if oligopoly increase prices?
The oligopolist faces a kinked‐demand curve because of competition from other oligopolists in the market. If the oligopolist increases its price above the equilibrium price P, it is assumed that the other oligopolists in the market will not follow with price increases of their own.
How do oligopolies cause market failure?
Oligopoly cause market failure in the following ways; interdependence, firms acting under oligopolistic conditions are said to be interdependent which means they cannot act independently of each other, therefore actors have to initiate strategies in decision making to either compete or collude(overt,covert,tacit ).
Why is oligopoly kinked demand?
What causes a kinked demand curve?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases.
What is kinked demand theory in economics?
The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
How do oligopolies set prices?
Firms in an oligopoly set prices, whether collectively – in a cartel – or under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market.
Is price and output under oligopoly indeterminate?
There is no general theory which can explain pricing and output decisions in all kinds of oligopoly situations. Thus, it is said that price and output under oligopoly is indeterminate. It is due to interdependence of other firms and absence of well defined goods. However, the price of a commodity is determined by its demand and supply.
What is the typical slope of a demand curve?
Thus, the slope of a demand curve is ∆P/∆Q. If the price falls we write -∆P/∆Q or if price rises demand falls, we write ∆P/∆Q. In either case, the slope becomes negative. The slope of a curve refers to its steepness indicating the rate at which it moves upwards or downwards.
