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The two Sweezy’s assumptions

The two Sweezy’s assumptions - demand...

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The two Sweezy’s assumptions suggest that neither a fall nor a rise in price would benefit the firm. Oligopoly price is rigidly fixed. Moreover, such a price rigidity causes a Kink in the demand curve with its lower segment steeper or inelastic and its upper segment flatter and more flexible. Consequently there is no incentive to alter price under oligopoly. This will be clearer when explained with the help of a figure. In Figure 44, there are two demand curves, DED, which is flatter and more flexible and D 1 ED 1 , which is steeper and less flexible. The two demand curves interest at point E which itself is a point of Kink. The upper portion of the flatter demand curve DE and the lower portion of the steeper
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Unformatted text preview: demand curve ED 1 together make up the Kinked Demand Curve. Under the above stated assumptions the lower portion of the flatter demand curve ED and the upper portion of the steeper demand curve D 1 E are not operative. Taking into account only relevant segments of the two demand curves a Kinked demand curve DED 1 has been formed and presented in Figure 45. Once we locate the point of Kink there is no further problem in oligopoly analysis. The point of Kink, E, is itself an equilibrium point. At such a point equilibrium output produced is Q and price charged is P....
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