# Kinked demand curve analysis. Why is the kinked demand curve kinked? 2022-10-13

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A kinked demand curve is a graphical representation of a firm's price-quantity relationship in which the curve has a "kink" or a break at a specific price point. This phenomenon occurs when a firm faces a price increase and a price decrease in different parts of the curve. The kinked demand curve model was developed by economists Richard Lipsey and Kelvin Lancaster in the 1950s as a way to explain why firms sometimes choose not to lower their prices in response to a decrease in market demand.

One of the key features of a kinked demand curve is the presence of two different elasticities of demand: a relatively elastic section on one side of the kink, and a relatively inelastic section on the other side. The elasticity of demand refers to the responsiveness of quantity demanded to a change in price. A demand curve is considered elastic if a small change in price leads to a large change in quantity demanded, and inelastic if a large change in price leads to a small change in quantity demanded.

The kinked demand curve model suggests that firms will face a relatively elastic demand for their product on the high-price side of the kink. This means that if the firm raises its price, it will experience a significant decrease in quantity demanded. In contrast, on the low-price side of the kink, the demand for the firm's product is relatively inelastic, meaning that a decrease in price will not lead to a significant increase in quantity demanded.

The kinked demand curve model can help to explain why firms may not always lower their prices in response to a decrease in market demand. If a firm were to lower its price on the high-price side of the kink, it would experience a significant increase in quantity demanded, but it would also experience a decrease in revenue due to the lower price. In contrast, if the firm were to keep its price the same, it would not experience as large of an increase in quantity demanded, but it would also not experience a decrease in revenue. As a result, the firm may choose to keep its price constant, even in the face of a decrease in market demand.

There are several factors that can influence the shape and location of a kinked demand curve. One of the most important factors is the level of competition in the market. In a highly competitive market, firms may be more likely to lower their prices in response to a decrease in market demand, as they seek to remain competitive and attract customers. In contrast, in a market with fewer competitors, firms may be more likely to keep their prices constant, as they have less pressure to lower their prices in order to attract customers.

Another important factor that can influence the shape and location of a kinked demand curve is the availability of substitutes for the firm's product. If there are many substitutes available, the demand for the firm's product may be more elastic, as customers have more options to choose from. In contrast, if there are few substitutes available, the demand for the firm's product may be more inelastic, as customers have fewer options to choose from.

In summary, the kinked demand curve is a useful model for explaining why firms may not always lower their prices in response to a decrease in market demand. The model takes into account the presence of two different elasticities of demand, as well as the influence of factors such as competition and the availability of substitutes. Understanding the kinked demand curve can help firms make informed pricing decisions and better understand the dynamics of their market.

## Key Diagrams

This cookie is used to distinguish the users. Assumptions of the Kinked Demand Curve Model 2. The curve is more elastic above the kink and less elastic below it. Students from 11 th Commerce and 12 th Commerce can download these study materials in a PDF format from Vedantu for free and practice without time constraints. CMPS 3 months This cookie is set by Casalemedia and is used for targeted advertisement purposes.

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## KINKED_DEMAND_CURVE_webapi.bu.edu

The course covers concepts related to analysis of macroeconomic variables as seen by the out come of producers and consumers, and relates them to policy decision. Economists racked up their brains all day but could not explain this strange phenomenon. There can be two possible reactions of rival organizations when there are changes in the price of a particular oligopolistic organization. Who introduced kinked demand curve? Then it is shown that the equilibrium price is attained at a kink of the demand curve of the leader, implying rigidity of price. So, when the price of cocaine decreases, many people try it for the first time.

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## Why is the kinked demand curve kinked?

Moreover, organizations are mutually dependent on each other in setting the pricing policy. When price leadership and price cartels exist in oligopolistic markets there is concerted behaviour in regard to the price changes and hence there is no kink in the demand curve in these cases. Vedantu LIVE Online Master Classes is an incredibly personalized tutoring platform for you, while you are staying at your home. Marginalist controversy average cost pricing. Even though houses may be bring forthing virtually homogeneous goods, these merchandises are still differentiated as is the instance with autos and soap pulverizations. Also, we have provided the lots of designing services like logo design, poster design, thumbnail design, and content writing servies. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable.

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## Kinked Demand Curve Model

The same, however, cannot be done for oligopolistic firms. At the output level of 40, the marginal revenue curve is vertical. This information us used to select advertisements served by the platform and assess the performance of the advertisement and attribute payment for those advertisements. Private Foreign Investment- Multinational Corporations Debate- the Role of Foreign Aid. Hours and Hours of Study with no fun, is a bad idea for you, foreseeing the long run. The Reason for Price Rigidity Explains in Differential Oligopoly.

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## Oligopoly Models: Sweezy’s Kinked Demand Curve Model and Collusion Model

Large punishments are dished out in many European and US industries due to the formation of trusts being outlawed. The information is used for determining when and how often users will see a certain banner. . This cookie is used for Yahoo conversion tracking. Put forward independently by Hall and Hitch 1939 and Sweezy 1939 , this theory sought to explain the rigidity of prices under oligopoly.

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## Oligopoly

Let us suppose that initially the price of the product of the firm is p 1 or Op 1 and the demand for the product is q 1 or Oq 1 If the firm now increases its price from p 1, the rival firms would keep their prices unchanged according to assumption v of this model. Students will be able to trace the origins of various processes of international global or regional economic integration, and to discuss their implications for the international patterns of productive specialization. The purpose of the cookie is to enable LinkedIn functionalities on the page. On the other hand, with lower cost the segment of the demand curve below the current price will become more inelastic because with the decline in costs, there is then greater certainty that the reduction in price by an oligopolist will be followed by his rivals. Students will be able to trace the development of the international financial architecture and of the international monetary system, and to evaluate the implications of different exchange rate regimes for domestic macroeconomic policy.

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## The kinked Demand Curve: Meaning, Examples & Characteristics

This cookie is used in association with the cookie "ouuid". Sessions get recorded for you to access for quick revision later, just by a quick login to your account. The data collected is used for analysis. When the cost of production falls, then segment of the demand curve above the current price will become more elastic because with lower costs there is a greater certainty that the increase in price by an oligopolist will not be followed by his rivals and will thus cause greater loss in sales. Paper Title: Development Economics Objective The goals of this course are for every student to describe the characteristics of and the special challenges facing developing nations, explain alternative theories of economic growth and evaluate their ability to explain the growth experiences of less-developed countries. There are few industries within the European Union and the United States of America that are amiss and monopolistically competitory consisting of many houses. AWSALBCORS 7 days This cookie is used for load balancing services provded by Amazon inorder to optimize the user experience.

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## The kinked demand curve revisited

The cookies store information anonymously and assign a randomly generated number to identify unique visitors. Professor Stigler has shown on empirical evidence that this assumption is not true in an inflationary situation. An air hose company may hold alone entree to a geographical location of a state enabling the house to run about as if they were a monopoly. Not to mention, this was extremely bad for business. Let us understand price and output decisions under cartels with the help of an example. The cookie is used for recognizing the browser or device when users return to their site or one of their partner's site. In other words, every price increase will go unnoticed by rivals.

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