Is there economic profit in oligopolies?
Table of Contents
The firms will expand output and cut price as long as there are profits remaining. The long-run equilibrium will occur at the point where average cost equals demand. As a result, the oligopoly will earn zero economic profits due to “cutthroat competition,” as shown in the next figure.
How does an oligopoly determine profit?
The oligopolist maximizes profits by equating marginal revenue with marginal cost, which results in an equilibrium output of Q units and an equilibrium price of P. The oligopolist faces a kinked‐demand curve because of competition from other oligopolists in the market.
What is oligopoly graph?
Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.
How does oligopoly affect the economy?
Understanding Oligopolies The economic and legal concern is that an oligopoly can block new entrants, slow innovation, and increase prices, all of which harm consumers. Firms in an oligopoly set prices, whether collectively—in a cartel—or under the leadership of one firm, rather than taking prices from the market.
What outcomes are possible under oligopoly?
There are different possible outcomes for oligopoly:
- Stable prices (e.g. through kinked demand curve) – firms concentrate on non-price competition.
- Price wars (competitive oligopoly)
- Collusion- leading to higher prices.
What is an oligopoly economics?
An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.
Why is oligopoly graph kinked?
The kinked demand curve illustrates the interdependence of firms in an oligopoly market. The reason why there is a kink in the demand curve is that there are two demand curves: one that is inelastic and one that is elastic. The kink occurs when both demand curves intersect each other.
What is the slope of the demand curve in an oligopoly market?
The answer is b: downward sloping. The demand curve in oligopoly markets slopes downward.
Do oligopolies make supernormal profit?
From a welfare point of view, whilst prices are good for consumers, they are not optimal for oligopoly firms, as supernormal profits are wiped out by destructively low prices. However, an oligopoly may not lead to this market outcome, as long as each firm can resist the temptation to start a price war.
How can an oligopoly cause market failure in economics?
Oligopoly cause market failure in the following ways; interdependence, firms acting under oligopolistic conditions are said to be interdependent which means they cannot act independently of each other, therefore actors have to initiate strategies in decision making to either compete or collude(overt,covert,tacit ).