Economics
The Kinked Demand Curve
The kinked demand curve is a concept in oligopoly theory that suggests firms face a demand curve with a kink at the current price level. This kink arises from the assumption that rival firms will match price decreases but not price increases. As a result, the firm perceives demand as elastic for price decreases and inelastic for price increases, leading to a gap in the demand curve.
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3 Key excerpts on "The Kinked Demand Curve"
eBook - PDF- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 13. The Kinked Demand Curve theory attempts to explain why an oligopolistic firm a. has relatively large advertising expenditures. b. fails to invest in research and development (R&D). c. infrequently changes its price. d. engages in excessive brand proliferation. 14. According to The Kinked Demand Curve theory, when one firm raises its price, other firms will a. also raise their prices. b. refuse to follow. c. increase their advertising expenditures. d. exit the industry. 15. Which of the following is evidence that OPEC is a cartel? a. Agreement on price and output quotas by oil ministries b. Ability to raise prices regardless of demand c. Mutual interdependence in pricing and output decisions d. Ability to completely control entry 16. Assume costs are identical for the two firms in Exhibit 10. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by a. Zeba Oil charging $100 and Tucker Oil charging $100. b. Zeba Oil charging $100 and Tucker Oil charging $50. c. Zeba Oil charging $50 and Tucker Oil charg-ing $50. d. Zeba Oil charging $50 and Tucker Oil charg-ing $100. 17. Suppose costs are identical for the two firms in Exhibit 10. If both firms assume the other will compete and charge a lower price, equilibrium will be established by a. Zeba Oil charging $100 and Tucker Oil charging $100. b. Zeba Oil charging $100 and Tucker Oil charging $50. c. Zeba Oil charging $50 and Tucker Oil charg-ing $100. d. Zeba Oil charging $50 and Tucker Oil charg-ing $50. 18. Suppose costs are identical for the two firms in Exhibit 10. Each firm assumes without formal agreement that if it sets the high price, its rival will not charge a lower price. Under these tit-for-tat conditions, equilibrium will be established by a. Zeba Oil charging $100 and Tucker Oil charging $100.
eBook - PDF- A. Knoester, A.H.E.M. Wellink(Authors)
- 2014(Publication Date)
- North Holland(Publisher)
The demand 'curve' has the form of an extreme kink. The comparative statics properties that follow do not need the kink to be that extreme; they require only that the solution of (8) bej> = w, which here amounts to assuming p > wg (k) but would hold as soon as the marginal revenue would drop at the kink from above wg (k) to below it. 82 E. MALINVAUD Reasons for The Kinked Demand Curve to provide an interesting approxima-tion in macroeconomics have been given for instance by T. Negishi (1979) and J. Drèze (1979) and will not be repeated here. Price rigidity may provide an ad-ditional reason in the context of this paper if randomness of demand is viewed as taking the form of random fluctuations of the demands to be served in future periods. With the specification (15), equations (10) and (11) take simpler forms: [p-wg(k)][-P(y)] = rk (17) -T(y) g?{k) = w (18) ü being replaced by y and y by u in the definitions of the functions T and G. Differentiation of these two equations gives the system that provides the basis for the comparative statics properties. 3 Easy interpretation of the pro-perties is found when the exogenous infinitesimal changes δρ, òw and òr in price and unit costs are replaced by their impacts on the relative cost of capital with respect to labor c = r/w and on the profitability indicator: E(py - wL) rK (19) which may be called Tobin's q, even though no reference is made to its evalua-tion by the stock market. The impacts are then defined by: (20) OC ÒÌ c r Sq^ Q y òw w òp òr -P r . p -wg(k) òp òw P w _ (21) Notice that (21) does not define the relative change of q, since this indicator also depends on the endogenous variables Ej>, EL and K.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
• The demand curve shows how much people will pur- chase at different prices when other factors that affect purchases are held constant. The demand curve slopes downward, reflecting the law of demand. • Analysis of the seller side of the market relies on the supply curve, which shows the amount that firms will offer for sale at different prices, other factors being constant. The supply curve typically slopes upward. • The intersection of the demand and supply curves, reflecting the behavior of buyers and sellers, identifies the equilibrium price and quantity. • A shift in the supply or demand curve produces a change in the equilibrium price and quantity. • For the market mechanism to operate, price must be free to adjust to any change affecting the behavior of buyers and sellers in the market. Thus, when the SUMMARY Price Elasticities of Supply and Demand and Short-Run Oil Price Gyrations Small fluctuations in oil supply or demand cause large gyrations in prices over the short run. For example, after the price of oil fell to below $12/barrel in 1998, the three largest exporters of oil to the United States—Saudi Arabia, Venezuela, and Mexico—reached an agreement, known as the Riyadh Pact, to reduce their collective output by 1.5 to 2.0 million barrels a day, about two to three percent of the global 73-million-barrel-per-day production at the time. The price of oil shot above $30 in the wake of the pact—an increase of 150 percent in response to the two to three percent supply cutback. Similarly, between April and June 2009, unrest in Nigeria resulted in that country’s oil production declining by 0.84 million barrels per day (or one percent of the prevailing world supply). The relatively small supply decrease caused a 75 percent increase in the price of oil—from $40 to over $70 per barrel.
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