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Economic Terms

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Keynesian AS curve

Keynesian economists believe that supply is the same in the short and long term and that there is no need for a separate SRAS curve. The Keynesian supply curve is perfectly elastic at low levels of real output and transitions to a perfectly inelastic curve as real output approaches the full employment level.

The diagram below illustrates the Keynesian view of the aggregate supply curve. Unlike the classical view, the keynesian view suggests that the supply curve is not always inelastic at every point i.e. there is a point in the economy when spare capacity exists and firms can increase production (elastic part of curve). But there is also a point in which full capacity is reached and therefore production cannot be changed (inelastic part of curve). This logic is summarised in the table next to the graph.

Keynesian economics

Is based on the work of John Maynard Keynes during the great depression. Amongst other things the main belief is that optimal economic performance can be achieved by using fiscal policy to manipulate aggregate demand. This is especially important during recessions and depressions.

Kinked Demand Curve

Is a model based on the theory of game theory, by graphically illustrating the high level of interdependence that exists in an oligopoly market. The idea is the demand curve has a kink to represent that a firm faces two different sections of their demand curve - which differs from the conventional downward-sloping demand curve. They face an elastic demand curve above the market price and an inelastic demand curve below the market price.

Below is an illustration of the kinked demand curve facing markets that have a high degree of interdependency, with the demand curve being elastic above the prevailing market price and inelastic below the prevailing market price. This is all caused because of rival firm reactions.


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