Explain why the demand curve facing a firm under monopolistic competition is negatively sloped.

A demand curve under monopolistic competition is negatively sloped. This is because in a monopolistic competition there are a large number of firms selling products which are close substitutes to each other. Also there are so a huge number of firms in the market that the consumer base gets divided among these large number of firms. In such a situation the firms’ main goal will be to attract more number of customers towards them so that their revenue earned increases and thus profits incurred increases. To attract more customers the firms will now compete with each other in price terms. In price competition, each firm will try to reduce its product price so that more number of people buy their products. Simply speaking, to sell more of its output, the firms will have to reduce the price. According to the law of demand, when price falls, demand increases and thus demand increases means producers will be able to sell more of its products. This is shown by the following diagram:

From the above diagram, it can be seen that when a firm has to increase its output from A to B, it has to reduce the price by a large amount that is from p1 to p2. Thus for each level output increase price will be reduced by the firm and thus the demand curve of a monopolistic firm will be negatively sloped.