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A-Level Economics · Kinked demand (oligopoly) diagram question
Why is demand ELASTIC above the kink?
The diagram
The answer
If the firm raises its price, rivals do NOT follow — so customers switch to them and the firm loses a lot of sales. Raise the price and your rivals happily sit still, undercutting you — a small rise costs you a large slice of your customers. So you do not raise it. Interdependence is strategic interaction. If I put my price up, my rivals are delighted to leave theirs alone and take my customers — so my quantity falls a long way for a small price rise: elastic. That is why the upper half of AR is drawn flat, and why a price rise is unattractive.
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This is one of 6 questions on the kinked demand (oligopoly) diagram — every corner lettered, every wrong answer diagnosed.
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