A demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are kept constant. Economists call this assumption ceteris paribus, a Latin phrase meaning “other things being equal.” Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product’s price, are changing. The Ceteris Paribus AssumptionĪ demand curve or a supply curve is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. Exactly how do these various factors affect demand, and how do we show the effects graphically? To answer those questions, we need the ceteris paribus assumption. These factors matter both for demand by an individual and demand by the market as a whole. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula. The more children a family has, the greater their demand for clothing. Finally, the size or composition of the population can affect demand. If you need a new car, the price of a Honda may affect your demand for a Ford. Prices of related goods can affect demand also. Professors are usually able to afford better housing and transportation than students, because they have more income. Ability to purchase suggests that income is important. If you neither need nor want something, you will not buy it. Willingness to purchase suggests a desire, based on what economists call tastes and preferences. That suggests at least two factors in addition to price that affect demand. We defined demand as the amount of some product a consumer is willing and able to purchase at each price. Visit this website to read a brief note on how marketing strategies can influence supply and demand of products.
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