CFA Practice Question
Which of the following factors is held constant when an economist constructs a demand schedule for a product?
II. expectations about the future price of the product
III. consumer tastes and preferences
I. prices of complements and substitutes
II. expectations about the future price of the product
III. consumer tastes and preferences
A. I, II and III.
B. I and III.
C. II and III.
Explanation: An economist constructing a demand curve is concerned only with how consumers react to varying prices of a good. Thus, the price of complementary or substitutes goods is held constant, consumer tastes and preferences are held constant and expectations of future prices are also held constant. The only varying element used in the construction of the schedule is price: the demand curve plots the level of demand associated with different prices of the good.
User Contributed Comments 4
| User | Comment |
|---|---|
| armanaziz | It's not clear to me how expectation of future price be constant if current price is changing. If people expect price to go down again tomorrow, they'll simply react to a price hike by stopping the purchase immediately - wouldn't they? If that is the case the demand schedule would be a horizontal line, instead of downward sloping! |
| iambroke | expectations shift the demand curve....so its useful to keep it constant |
| uviolet | it is the expectation that is kept constant. the action based on the expectation is not constant neither are the future prices |
| Rohule | ceteris paribus |