Demand Curve under Monopoly

In a monopoly market structure, the demand curve faced by the monopolist is typically downward sloping, indicating that the monopolist can sell more units only by lowering the price. This characteristic shape directly results from the monopolist being the sole provider of a particular good or service in the market, without any close substitutes available to consumers. Barriers preventing other firms from entering the market could be due to the monopoly firm earning a patent on the design of a product (like a pharmaceutical drug), or a government regulation preventing any competitors from entering the market (like an electrical power company). As a result, the entire market demand curve for the product becomes the monopolist's demand curve.

The demand curve's downward slope exists because consumers are more willing to purchase increased quantities of a good only if the price of the good falls. This is due to the diminishing marginal utility consumers derive from consuming each additional unit of the good. As a result, the consumer's willingness to pay for additional units of the good decreases with the quantity of the good offered for sale.

The monopolist has full control over the supply of the product and can, therefore, completely influence its price and quantity. This unique ability to set prices gives the monopolist significant economic power.

Like the perfectly competitive firm, the average revenue (AR) at each quantity is the price that the monopolist can charge at that output level, which is directly determined by the demand curve. So, at any given output level, AR = Price = Demand for both firms.

However, the marginal revenue (MR) is different for a monopolist. While the MR for a perfectly competitive firm is constant across all quantities, the MR for a monopoly firm falls as quantity increases. This means the addition to total revenue declines as the quantity sold increases.

As a result, the elasticity of demand varies along the market demand curve for a monopolist. The monopolist will always operate in the elastic portion of the demand curve, to maximize revenue. In the elastic range, a small decrease in the price leads to a proportionally more significant increase in the quantity demanded. Since total revenue is calculated as price × quantity, a small reduction in price will cause a larger increase in quantity sold, resulting in higher total revenue.