Civil Engineering Reference
In-Depth Information
flow that takes place during a certain time period. Ideally, the time period should
be specified as a month, year, week, or whatever. Without a time dimension, the
statements relating to quantity become meaningless.
CETERIS PARIBUS
The second qualifying remark relates to the Latin phrase
ceteris paribus
, which
means other things being equal or constant. This is an important assumption
to make when dealing with a graph showing two variables. For example, price is
not the only factor that affects supply and demand. There are many other market
conditions that also affect supply and demand and we cover these in
Chapters 4
and
5.
In the exercise above, constructing
Figures 3.2
and
3.3,
we assumed
ceteris
paribus
. We did not complicate the analysis by allowing, for example, consumers'
income to change when discussing changes to the price of a good. If we did, we
would never know whether the change in the quantity demanded or supplied was
due to a change in the price or due to a change in income. Therefore, we employed
the
ceteris paribus
technique and assumed that all the other factors that might affect
the market were held constant. This assumption enables economists to be more
rigorous in their work, studying each significant variable in turn. The
ceteris paribus
assumption approximates to the scientific method of a controlled experiment.
SUPPLY AND DEMAND CURVES
When using supply and demand curves to illustrate our analysis, they will frequently
be drawn as straight lines. Although this is irritating from a linguistic point of view,
it is easier for the artist constructing the illustrations and acceptable to economists,
since the 'curves' very rarely refer to the plotting of empirical data. It is worth
noting, therefore, that so-called supply and demand 'curves' are usually illustrated as
straight lines that highlight basic principles.
Key Points 3.2
❍
On a supply and demand graph, the horizontal axis represents quantity and
the vertical axis represents the price per unit.
❍
Supply and demand curves illustrate how the quantity demanded or
supplied changes in response to a change in price. If nothing else changes
(ceteris paribus)
, demand curves show an inverse relationship (slope
downward) and supply curves show a direct relationship (slope upward) as
shown in
Figure 3.3
.
❍
To understand the premise upon which supply and demand diagrams
are drawn, it is important to remember three criteria: (a) the time period
involved, (b) the
ceteris paribus
assumption and (c) the shape of the
'curves'.
