in a kinked demand curve

Differing Objectives and Policies of Firms

1. Profit Maximisation (most common)

Firms aim to make the biggest profit: the difference between total revenue and total cost.

📈 Key rule: Produce where marginal revenue (MR) equals marginal cost (MC). In symbols: \$MR = MC\$.

2. Sales Maximisation

Firms want to sell the most units, even if it means lower profit per unit.

📉 Implication: They may set a lower price to increase demand, accepting a smaller margin.

3. Cost Minimisation

Firms try to keep costs as low as possible while keeping output constant.

🛠️ Example: Using cheaper raw materials or more efficient machinery.

4. Market Share Maximisation

Firms focus on gaining a larger share of the market rather than immediate profit.

🏆 Strategy: Lower prices, aggressive advertising, or product innovation.

5. Social Objectives

Some firms (e.g., cooperatives, NGOs) aim to maximise social welfare or community benefits.

🌍 Goal: Provide affordable goods, create jobs, or reduce environmental impact.

6. Kinked Demand Curve

The kinked demand curve explains why prices in some industries are sticky (hard to change).

🔄 Analogy: Think of a rubber band that snaps back when stretched too far.

Key Features

Price LevelElasticity of DemandFirm’s Response
Above the kinkHighly elastic (\$|ε|>1\$)Firms expect rivals to match price cuts → no price change.
Below the kinkInelastic (\$|ε|<1\$)Firms expect rivals not to follow price hikes → no price change.

📌 Result: Prices tend to stay at the kink because firms avoid price wars.

Illustrative Example: Fast‑Food Chain

Imagine a burger chain that faces a kinked demand curve.

  • If the chain lowers its price, competitors will also lower theirs → price war → profits fall.

  • If the chain raises its price, competitors keep theirs unchanged → customers switch → sales drop.

  • Therefore, the chain keeps its price steady, even if costs rise.

Exam Tips

  1. Draw a clear kinked demand curve: show the kink point and label elasticities.

  2. Explain why firms are reluctant to change price above or below the kink.

  3. Use the example of a fast‑food chain or a mobile phone manufacturer to illustrate.

  4. Remember: \$MR\$ is not constant on a kinked curve; it has a jump at the kink.

  5. Show that the equilibrium price is at the kink, where \$MR = MC\$ is satisfied.

  6. Use the term “price rigidity” and explain its relevance to the kinked demand model.