The Importance of “other things equal” Assumption

7 May

   One more time we should recall the characteristics of demand and supply curve. Both these schedules present the relationship between price and quantity demanded and quantity supplied, other things equal. The downsloping demand curve shows us indirect relationship between quantity of demanded goods and price, other things equal. The upsloping curve of quantity supplied versus price graph shows us positive relationship between them, other things equal.
   Why we should write “other things equal” assumption in both these cases? It’s quite simple; sometimes we can find some situations that are in conflict with these economics principles.

   Example1: Producers of red wine sell one billion of bottles at price of 20$ in one year, the following year they sell 3 billion of bottles of wine at price of 25$, in the third year they sell 10 billion of bottles of white wine.  In this case price and demand vary directly, so these data may seem to be a little bit odd, but if we examine it carefully we may see that they don’t refute law of demand. We only got that low of demand’s other-things-equal assumption has been violated over three year.  We can explain this rise in demand by getting higher income and changing tastes of buyers.
    Example 2: The price of mango has increases over some years, but sellers supply less quantity of it on the marker. This event seems to contradict relationship between price and quantity supplied. Again other-things-equal assumption related to the supply curve was violated. This situation can be explain by poor harvest of mango in that years, which decrease quantity supplied of this fruit in the market.


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