Diagrams

• What is the Kinked Demand Curve Model?

  Suggests that prices will be fairly stable and there is little incentive for firms to change prices. Therefore, firms compete using non-price competition methods.
• Kinked Demand Curve Assumptions

  • Firms are profit maximisers.
  • If one firm increases the price, they will lose a large share of the market because they will become uncompetitive.
  • Other firms won’t follow suit. Therefore, for a price increase, demand is price elastic.

  
  

  • If one firm cuts price, they would gain a big increase in market share. Other firms will follow suit because they don’t want to lose market share. Therefore, for a price cut, demand is price inelastic.
• Kinked Demand Curve Limitations

  • It doesn’t explain how the price was arrived at in the first place.
  • Firms may engage in price competition.
  • Firms may not seek to maximise profits, but prefer to increase market share and so be willing to cut prices.
  • Some firms may have very strong brand loyalty and be able to increase the price without demand being very price elastic
• Kinked Demand Curve Diagram

  In the kinked demand curve model, the firm maximizes profits at Q1, P1 where MR=MC.

  Thus a change in MC, may not change the market price. It suggests prices will be quite stable.

  A) PED is elastic

  B) PED is inelastic

  C) D=AR

  D) MR

  E) Change in MC leads to same price P1

  F) MC1

  G) MC2

  
• Economies of Scale for Oligopoly

  Oligopolies may benefit from economies of scale. This enables lower average costs with increased output. Firms in oligopoly producing at Q1 achieve lower prices of AC1.

  A) Small

  B) higher

  C) average costs

  D) Increasing

  E) output

  F) lower

  G) average costs

  H) LRAC

  
• Collusive Oligopoly

  If firms in oligopoly collude and form a cartel, then they will try and fix the price at the level which maximises profits for the industry.

  • They will then set quotas to keep output at the profit maximizing level.

  A) MC

  B) AC

  C) Supernormal profits

  D) Deadweight welfare loss

  E) D=AR

  F) MR