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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

Which of the following is an assumption underlying the law of demand?

The law of demand assumes tastes, incomes, prices of related goods and expectations remain unchanged, the ceteris paribus condition. This isolates the effect of the good's own price on quantity demanded, because changes in other factors would shift the demand curve instead.

  1. AConsumers' tastes, incomes and prices of related goods remain unchangedCorrect
  2. BConsumers' incomes rise in proportion to price changes
  3. CThe good's supply remains fixed in the market
  4. DThe good is a necessity with no substitutes

Explanation

The law of demand holds under ceteris paribus: tastes, income, prices of related goods and expectations remain constant. Income changes would shift the curve and blur the price-quantity link. Supply and the absence of substitutes are not required assumptions.

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