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The law of demand states that, other things equal, when the price of a good increases:
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3. Supply and Demand
The Basics of Demand
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Which of the following best describes the shape of the demand curve faced by a pure monopolist?
A
It is downward sloping, indicating that the monopolist must lower price to sell more units.
B
It is perfectly elastic, meaning the monopolist can sell any quantity at a fixed price.
C
It is perfectly inelastic, meaning the monopolist can sell any quantity at any price.
D
It is upward sloping, indicating that higher prices lead to higher quantities demanded.
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Understand that a pure monopolist is the sole seller in the market, so the demand curve it faces is the market demand curve itself.
Recall that the market demand curve typically slopes downward, meaning that to sell more units, the monopolist must lower the price.
Recognize that a perfectly elastic demand curve (horizontal) implies the firm is a price taker, which is not true for a monopolist.
Note that a perfectly inelastic demand curve (vertical) means quantity demanded does not change with price, which is unrealistic for a monopolist.
Understand that an upward sloping demand curve would imply higher prices increase quantity demanded, which contradicts the law of demand.
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