Introduction

After you have worked through this section of the learning unit, you should be able to:

  • describe the relationship between price and quantity demanded
  • explain the importance of the ceteris paribus condition
  • adapt the demand equation to reflect the ceteris paribus condition

In this section we take a closer look at the impact the price of a good or service has on the quantity demanded. In other words, we investigate the relationship between Px and Qd.

What do you think people do when the price of a good or service they use increases?




Before we answer this question we need to deal with the ceteris paribus condition.

To analyse the impact of a change in the price of a good or service on the quantity demanded for it, we need to keep all the other factors that we have listed (income, preferences, weather, etc.) the same by assuming that they remain unchanged. This relates to the ceteris paribus assumption.

Ceteris paribus is the Latin expression for “everything else remaining the same”. It is not possible to study the effect of a price change on the quantity demanded if the other factors change at the same time. If more than one factor changes, we would not know which factor causes a change in the quantity demanded.

Watch the following video clip for more on the concept of ceteris paribus:

Our question should therefore have read as follows: “What do you think people do when the price of a good or service they use increases, given the fact that everything else remains the same?

It is to this relationship between the price of a good or service and the quantity demanded that we now turn, given that the ceteris paribus condition holds.

In terms of our demand equation we put a bar on top of these other variables to indicate that they remain unchanged.

Do the following activity before you proceed:

A friend of yours who owns a flower-selling business has the following opinion about the law of demand: She does not think that the law of demand is valid for red roses, because during February, when the price of red roses was very high, she sold many more. It therefore seems that there is a positive relationship between the price of red roses and the quantity demanded of it:

Which one of the following is the best response to her argument?





Your best answer would be d.

This relates to the ceteris paribus condition. Other things have changed that caused her to sell more red roses. In the case of red roses in February, the reason for the increase in the demand is Valentine's Day.

This is the best answer.

This relates to the ceteris paribus condition. Other things have changed that caused her to sell more red roses. In the case of red roses in February, the reason for the increase in the demand is Valentine's Day.

The symbol for quantity demanded is _______






No, the symbol for quantity demanded is Qd

Yes, the symbol for quantity demanded is Qd.

The symbol for price of a good or service is ______





No, the symbol for price of a good or service is Px.

Yes, the symbol for price of a good or service is Px.