There are not many jobs for masters and PhD holders. Not nearly as many as you'd think. It doesn't make sense to keep granting everyone the degree if they can't do anything with it. And those degrees are much harder to earn than undergrad - if you didn't have great undergrad grades, chances are good you won't make it. Less than 5% of the country has a masters or PhD. 95% of jobs don't require one.
It's higher level work, if you can't handle it there's no reason to give a spot and funding to you. If you weren't willing or able to get the stellar grades as an undergrad you definitely aren't going to change in a grad program. Grad school was the first time I've ever found school to be hard, and that's coming from a top undergrad school.
There are fewer graduate programs for any given subject than there are undergraduate programs. With the job market being what it is lots of people are going back to school or staying in school. Demand is high, space is low.
I don't know which graduate school you're talking about but the one I went to was a cake walk. And that was at a well known University and the program I was in was rated number 3 in the country in my field of study. Graduate school is not competitive at all.