Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

P
Q
d
D
P
O
R
QR
S
1
2
3
P
P
P
Q
d
D
Figure 1.2 
 
In figure 1.2 dd and DD represent the demand curves. The 
demand curve dd is based on the assumption that when one seller 
changes his price, the other sellers do not change their prices and 
keep their prices unaffected. The demand curve DD is drawn on 
the assumption that when one seller changes his price, the other 
sellers also change their prices in the same direction. The demand 
curves dd and DD intersect at point P. Hence, the demand curve 
is dPD which has a kink at the point P. Suppose, if the price is 
reduced from OP
1
to OP
2
, then the other sellers also reduce the 
price, the quantity sold by this seller will increase by QR. But if the 
other sellers do not reduce prices the quantity sold will increase by 
QS. Similarly, when the price is increased from OP
1
to OP
3
the 
quantity demanded is reduced by PQ' (if other sellers do not 
increase their prices) and the quantity demanded will be reduced 
to PR' (if other sellers also increase their prices). Since it is 
assumed that price decrease by a firm will be matched by a price 
reduction by the competitors but an increase in the price is not 
matched by the competitors, the relevant demand curve is dPD, 
which has a kink at P. The upper section of the kinked demand 
curve has higher price elasticity than the lower part. 
The position of the curve is determined by the location of 
OP
1
, the price at which the oligopolist sells his product. Thus, the 
price OP
1
is given data and it is not determined in the model. 
If the demand curve is kinked, the implication of kink in the 
demand curve faced by the seller in the market can be explained 
with the help of the following figure 1.3. 

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