Natural monopoly: effects of product demand on price and quantity produced.

Abstract

This work theoretically analyzes the possibility that in the presence of decreasing average and/or marginal costs, greater demand for the product in question reduces the sales price of that product. The answer is that this is possible, but it is not a general result. For the price to fall when demand increases, it is a necessary, but not sufficient condition for the marginal cost to be decreasing. In the presence of a logarithmic demand and a logarithmic variable total cost function, where there are increasing returns in production, the analyzed effect occurs. When the demand is linear and the cost structure is as already described, the analyzed effect does not occur. In real life, there is a continuous reduction in prices of products that may have decreasing marginal costs, which could be due in part to the effect analyzed here.