Answer to Question #263380 in Microeconomics for Njeri

Question

With the aid of a diagram explain an oligopoly kinked demand curve

Answer 1

When a demand curve is not a straight line but has varying elasticity at higher and lower prices, it is called a kinked demand curve. This oligopoly model argues that prices are stiff and that firms will have distinct consequences if they raise or lower their pricing.

We can deduce from the graph that

P is the current price level.

The company creates and sells output = OM.

In addition, the demand curve's top segment (dP) is elastic.

The demand curve's lowest portion (PD) is generally inelastic.