Chapter 4, Problem 1Q

To determine

Meaning of the term “holding all else equal”, and its application in the movement of demand and supply curves.

Explanation of Solution

The term is used to explain that an action takes place assuming that all the other factors, which have the potential to influence the demand and supply for a particular service or good, do not change or remain constant.

When discussing the movements in supply and demand curves, if all the other factors influencing demand and supply are held constant, a change in price will cause the equilibrium level of price and quantity to change along the supply or demand curve.

The following graphs explain such movements along the supply curve and the demand curve, respectively.

Observe the change in the price and the quantity demanded/supplied, while assuming the other factors, which have an effect on demand and supply, continue to stay the same and do not bring change in demand or supply.

An increase in price causes the supply curve to move upwards causing the supplied quantity to increase. There is a downward movement when price falls for the supply curve.

A decrease in price causes the demand curve to move downwards, which can be seen from the diagram, causing the demanded quantity to increase. The demand curve moves upwards when prices rise.