Ceteris paribus Assignment Help

Assignment Help: >> Derivation of The Demand Curve - Ceteris paribus

Ceteris paribus:

Assuming again that the consumer has two goods - meat pie and soft drinks to buy, the explanation of the law of demand goes like this:

From the initial equilibrium position described as

1805_Ceteris paribus.png

Suppose the unit price of meat pie falls, the equality of the two ratios in equation (1) will be upset to give a disequilibrium situation as described in equation (3) below

2164_Ceteris paribus1.png

The assumption of consumer rationality dictates that the situation in equation (3) will elicit a reaction from the consumer in terms of change in the quantity of meat pie to be purchased in order to make the ratios in equation (1) equal again.

Mathematically, this will require (for example), MUm to fall in the same proportion as the fall in Pm. According to the law of diminishing marginal utility, one way to get the marginal utility of meat pie to fall is to consume more of meat pie - that is, acting exactly as the law of demand predicts: A fall in the price of a commodity would cause a greater quantity of it to be demanded, ceteris paribus.

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