Answer to Question #323402 in Microeconomics for Sumit

Question

(a) The Organisation of Petroleum Exporting Countries (OPEC) is an example of which

form of market structure? Discuss its characteristic features. 10

(b) Using an appropriate diagram discuss Paul Sweezy’s Kinked Demand curve theory.

Answer 1

a)Organization of Petroleum Exporting Countries (OPEC) is an example of oligopoly form of market structure (Zubaidi et al, 2021). some of characteristics features of oligopoly include:

i. presence of few firms- under the oligopoly market structure, there are few large firms and the exact figure of the number of these firms is not defined.

ii. interdependence- companies under this market structure are interdependent which means the actions of one company has implications of actions of the other companies

iii. Non-price competition- the companies are in a position to have various influences on the market price

iv. Barriers to entry- there exists stringent barriers that prevent entry of new companies hence the reason of having few companies in this market structure

v. nature of product produced- under the oligopoly market structure, products are homogenous or could also be different from company to company

b) Paul Sweezy’s Kinked Demand curve theory Diagram

Fig 1: Paul Sweezy’s Kinked Demand curve theory Diagram

(Source (Zubaidi et al, 2021)

Explanation

The price in an oligopoly market structure is P as indicated on the diagram. Each company holds that it faces the demand curve D shown. at prices above P, a small price increase brings a significant decrease in the quantity sold since other companies does not raise their prices (Galles & Sexton, 2021). since the demand curve is kinked, the marginal revenue curve, MR, has a break indicated as AB on the diagram. Shifts in marginal costs inside the range AB leave the quantity and price unaltered.

Reference

Galles, G. M., & Sexton, R. L. (2021). Why the kinked demand curve may still be useful. The European Journal of the History of Economic Thought, 28(4), 559-576.

Zubaidi, F. N. M., & Al-Ani, Y. A. A. (2021). THE KINKS OF OIL DEMAND CURVE AND OLIGOPOLY MARKET. Academy of Accounting and Financial Studies Journal, 25, 1-11.