Why Does the Demand Curve for a Monopolist Slope Downward?
The demand curve for a monopolist slopes downward because the market demand curve, which is downward sloping, applies to the monopolist’s market activity. Demand for the monopolist’s product increases as its price decreases. According to Boundless, an educational resource website, the downward sloping demand curve contributes to market inefficiency, which leads to excess production capacity and a loss of consumer surplus.
As the only producer in the market, the monopolist exhibits price searching as opposed to price taking behavior. The monopolist searches the demand curve for the profit-maximizing price where the cost of producing an additional unit of output, marginal cost, is equal to the additional revenue received from selling, marginal revenue, an additional unit of product.
Because the demand curve slopes downward, marginal revenue decreases with each unit of production beyond the profit-maximizing quantity. Thus, the monopolist loses money with each additional unit produced, as marginal cost exceeds marginal revenue. This causes the restricted output and higher costs that characterize products produced by monopolists.
Because they have no competition, monopolists have no incentive to improve their products. Much of their focus is instead placed on maintaining monopolistic conditions through lobbying and other tactics that dissuade competitors from entering the market.