Question

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

20 Oct 2021
Answer :
Word Count : 630

Paul Sweezy's Kinked Demand Curve theory is an important concept in the field of microeconomics that explains the behavior of oligopolistic markets. Oligopoly refers to a market structure characterized by a small number of large firms dominating the industry. Sweezy's theory provides insights into how firms in an oligopoly might set prices and output levels based on their expectations of rival firms' reactions.

### The Kinked Demand Curve:

The central idea of Sweezy's theory revolves around the shape of the demand curve faced by an oligopolistic firm. According to the theory, an oligopolistic firm faces a kinked demand curve for its product. This kink in the demand curve is the result of two distinct assumptions about how rival firms in the industry will react to price changes.

1. Price Rigidity Above the Kink:
   - Sweezy assumes that rival firms are likely to match any price increases by a competitor but may not follow price decreases. ________ __________ _______ ______ ________ ____ _____ _________ ________.
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