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ASSUMPTIONS, CLASSICAL ECONOMICS: Classical economics, especially as directed toward macroeconomics, relies on three key assumptions--flexible prices, Say's law, and saving-investment equality. Flexible prices ensure that markets adjust to equilibrium and eliminate shortages and surpluses. Say's law states that supply creates its own demand and means that enough income is generated by production to purchase the resulting production. The saving-investment equality ensures that any income leaked from consumption into saving is replaced by an equal amount of investment. Although of questionable realism, these three assumptions imply that the economy would operate at full employment.

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Lesson 20: Oligopoly | Unit 4: Analysis Page: 16 of 24

Topic: Kinked-Demand Curve Analysis <=PAGE BACK | PAGE NEXT=>

  • The kinked-demand curve (D) and corresponding marginal revenue curve (MR) are presented in this graph:

  • Note that the marginal cost curve (MC) intersects the marginal revenue curve in the vertical segment.

  • This intersection is implied by the basic construction of the kinked-demand curve.

  • For small changes in production, up or down, the oligopolistic firm maintains existing production and price.

  • This is the source of price rigidity for oligopoly.


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BILATERAL MONOPOLY

A market containing a single buyer and a single seller, or the combination of a monopoly market and a monopsony market. A market dominated by a profit-maximizing monopoly tends to charge a higher price. A market dominated by a profit-maximizing monopsony tends to pay a lower price. When combined into a bilateral monopoly, the buyer and seller both cannot maximize profit simultaneously and are forced to negotiate a price and quantity. Then resulting price could be anywhere between the higher monopoly price and the lower monopsony price. Where the price ends ups depends on the relative negotiating power of each side.

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