Supply And Demand - Chapter 3 Page 7
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Part I: Preliminaries
Quantity Demanded Depends on Price. The price of the good is just one variable
among many that influences quantity demanded. But because one of our main pur-
poses in building a supply and demand model is to explain how prices are deter-
mined, we try to keep that variable front-and-center in our thinking. This is why for
the next few pages we’ll assume that all other influences on demand are held con-
stant, so we can explore the relationship between price and quantity demanded.
T
L
D
HE
AW OF
EMAND
How does a change in price affect quantity demanded? You probably know the
answer to this already: When something is more expensive, people tend to buy less
of it. This common observation applies to air travel, magazines, guitars, and virtu-
ally everything else that people buy. For all of these goods and services, price and
quantity are negatively related: that is, when price rises, quantity demanded falls;
when price falls, quantity demanded rises. This negative relationship is observed so
regularly in markets that economists call it the law of demand.
The law of demand states that when the price of a good rises and everything
Law of demand
As the price of a
good increases, the quantity
else remains the same, the quantity of the good demanded will fall.
demanded decreases.
Read that definition again, and notice the very important words, “everything else
remains the same.” The law of demand tells us what would happen if all the other
influences on buyers’ choices remained unchanged, and only one influence—the
price of the good—changed.
This is an example of a common practice in economics. In the real world, many
variables change simultaneously. But to understand changes in the economy, we
must first understand the effect of each variable separately. So we conduct a series
of mental experiments in which we ask: “What would happen if this one influence—
and only this one—were to change?” The law of demand is the result of one such
mental experiment, in which we imagine that the price of the good changes, but all
other influences on quantity demanded remain constant.
Mental experiments like this are used so often in economics that we sometimes
use a shorthand Latin expression to remind us that we are holding all but one influ-
ence constant: ceteris paribus (formally pronounced KAY-ter-is PAR-ih-bus,
Ceteris paribus
Latin for “all
else remaining the same.”
although it’s acceptable to pronounce the first word as SEH-ter-is). This is Latin for
“all else the same,” or “all else remaining unchanged.” Even when it is not explic-
itly stated, the ceteris paribus assumption is virtually always implied. The exceptions
are cases where we consider two or more influences on a variable that change simul-
taneously, as we will do toward the end of this chapter.
T
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S
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C
HE
EMAND
CHEDULE AND THE
EMAND
URVE
To make our discussion more concrete, let’s look at a specific market: the market for
real maple syrup in the United States. In this market, we’ll view the buyers as U.S.
households, whereas the sellers (to be considered later) are maple syrup producers
in the United States or Canada.
Demand schedule
A list showing
Table 1 shows a hypothetical demand schedule for maple syrup in this market.
the quantities of a good that
This is a list of different quantities demanded at different prices, with all other vari-
consumers would choose to
ables that affect the demand decision assumed constant. For example, the demand
purchase at different prices,
schedule tells us that when the price of maple syrup is $2.00 per bottle, the quantity
with all other variables held
demanded will be 60,000 bottles per month. Notice that the demand schedule obeys
constant.
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