EconomicsNotes

The theory of oligopoly is focussed on a stable market in which a few large firms dominate the supply of items and can have power over price or supply. This may be because of economies of scale or high barriers to entry. Barriers to entry can include sunk costs, legal and regulatory protections and requirements such as patents or performance rules, and resource availability. Within such a market, the theory assumes that the Demand curve for the individual firms corresponds to their Average revenue curves. These lines are ‘kinked.’ This means that the AR is inelastic and stable below a certain price point, because customers are not purchasing below the kink based on price, and elastic above the point, because the customers are price sensitive. Very few oligopoly models assume that the AR line is vertical below the kink, which means that there is some scope for different prices at different levels of output. Given that customers are highly inelastic, any price cuts would nevertheless...

  Indirect taxes are taxes which are levied on producers by the government, part or all of which the producer can choose to pass on to the consumer. If the consumer is price sensitive , the producer will absorb the part of the tax which enters the producer’s previous producer surplus and pass on the part that is within the pre-tax consumer surplus. In situations where the consumer’s demand is completely elastic, the producer will absorb the full cost.      The qualities of demerit goods make them attractive for the imposition of indirect taxes. A demerit good is something that is acknowledged to be, on balance, bad for society and for individuals. The demerit good imposes costs upon third parties, society in general, and possibly users with imperfect information. These negative externalities mean that the private market price and the optimum social price, once social marginal cost is considered are different.   Overall, the market will oversupply and under-...