2.1 Demand

The good's own price has fallen from $3.50to$2.50. All other factors (income, tastes, prices of related goods, expectations, number of consumers) remain constant — the ceteris paribus assumption holds.

The law of demand states that, ceteris paribus, a fall in a good's own price leads to a rise in quantity demanded. Because it is the good's own price that changed, this is represented as a movement along the existing demand curve, not a shift of the curve.

A fall in price producing a rise in quantity demanded is specifically called an extension of demand — a movement down and to the right along the same fixed demand curve. The curve itself remains in its original position.

The correct answer is that quantity demanded increases as consumers move down along the existing demand curve. This is a movement along the curve, not a shift — the distinction is fundamental to demand analysis.

The question asks what happens to the market for sports drinks when the product's own price falls, all else equal.

'The demand curve shifts rightward' is incorrect. A rightward shift represents a change in demand caused by a non-price determinant. A change in the good's own price never shifts the demand curve — it only moves along it.

'The demand curve shifts leftward because cheaper goods are seen as lower quality' introduces a taste/perception argument that is not given in the scenario. Under ceteris paribus, tastes are unchanged, so no leftward shift occurs.

'Demand increases due to the income effect causing a shift in the demand curve' confuses the income effect (which explains why quantity demanded rises along the curve when price falls) with a shift of the curve. The income effect explains a movement along the curve, not a shift of it.

The only correct statement is that quantity demanded increases as consumers move down along the existing demand curve — this is an extension of demand caused by the good's own price change.

The question asks about the ceteris paribus assumption, which is Latin for 'all other things being equal' or 'all other things remaining unchanged.'

By holding factors such as income, tastes, the prices of related goods, expectations, and the number of consumers constant, economists isolate the effect of price alone on quantity demanded. Without this assumption, we could not determine whether a change in quantity demanded was caused by the price change or by something else changing at the same time.

The correct answer is 'Holding all influences on demand constant except the price of the good being studied.' This is precisely what ceteris paribus means in the context of demand analysis.

The question asks what ceteris paribus means when economists apply it to demand analysis.

'Allowing all variables to change simultaneously' is the opposite of ceteris paribus. Allowing multiple variables to change at once makes it impossible to isolate the effect of price on quantity demanded.

'Assuming consumers always prefer cheaper goods regardless of quality' is a misstatement of consumer behaviour and is not what ceteris paribus means. It describes a particular preference pattern, not a methodological assumption about holding variables fixed.

'Fixing quantity demanded and observing how price adjusts' describes a different analytical procedure and confuses the dependent and independent variables. Ceteris paribus does not fix quantity; it fixes all non-price determinants.

The correct answer is 'Holding all influences on demand constant except the price of the good being studied' — this is the precise methodological role of the ceteris paribus assumption.