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Principles of Economics- Mankiw (5th) 66

Principles of Economics- Mankiw (5th) 66 - analyze events...

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70 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK horizontal axis. The downward-sloping line relating price and quantity demanded is called the demand curve. CETERIS PARIBUS Whenever you see a demand curve, remember that it is drawn holding many things constant. Catherine’s demand curve in Figure 4-1 shows what happens to the quantity of ice cream Catherine demands when only the price of ice cream varies. The curve is drawn assuming that Catherine’s income, tastes, expectations, and the prices of related products are not changing. Economists use the term ceteris paribus to signify that all the relevant vari- ables, except those being studied at that moment, are held constant. The Latin phrase literally means “other things being equal.” The demand curve slopes downward because, ceteris paribus, lower prices mean a greater quantity demanded. Although the term ceteris paribus refers to a hypothetical situation in which some variables are assumed to be constant, in the real world many things change at the same time. For this reason, when we use the tools of supply and demand to
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Unformatted text preview: analyze events or policies, it is important to keep in mind what is being held con-stant and what is not. MARKET DEMAND VERSUS INDIVIDUAL DEMAND So far we have talked about an individual’s demand for a product. To analyze how markets work, we need to determine the market demand, which is the sum of all the individual demands for a particular good or service. Catherine’s Demand Price of Ice-Cream Cone Price of Ice-Cream Cone Nicholas’s Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones $3.00 1.50 2.00 2.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones $3.00 1.50 2.00 2.50 1.00 0.50 ± demand curve a graph of the relationship between the price of a good and the quantity demanded ceteris paribus a Latin phrase, translated as “other things being equal,” used as a reminder that all variables other than the ones being studied are assumed to be constant...
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