Th3.4: Kinked Demand Theory Flashcards

1
Q

Refer to PP

Look at Graph 36. What happens if a firm raises its prices?

A

other firms will not follow since they know their comparatively lower price means they are more competitive

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2
Q

Refer to PP

Look at Graph 36. If a firm lowers its prices…

A

other firms will follow since they want to remain competitive

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3
Q

Refer to PP

Look at Graph 36. Above P1 the curve is…

A

elastic - since competitors are offering lower prices

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4
Q

Refer to PP

Look at Graph 36. Below P1 the curve is…

A

inelastic - since other firms lower their prices too so there is little difference in sales for the original firm

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5
Q

Refer to PP

Look at Graph 36. What does this kink in demand mean?

A

there is a gap in the MR curve and so a rise or fall in costs or demand is likely to have no impact on price or output - prices tend to be oligopolistic because of this

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6
Q

Refer to PP

Look at Graph 36. What is the problem with the kinked demand curve theory?

A

it assumes there is an initial price set within the market and does not explain why this price was set (however it does explain why prices tend to be stable)

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