In the context of the demand curve, how does the assumption of ceteris paribus relate to the relationship between price and quantity demanded?

• A. It means consumer preferences are allowed to change freely as price changes, causing a movement along the demand curve.
• B. It means all other determinants of demand (such as income, tastes, and prices of related goods) are held constant so the effect of a price change on quantity demanded can be isolated.
• C. It means the price of the good is held constant while income changes, so the demand curve shows how quantity demanded varies with income.
• D. It means changes in price cause the demand curve to shift rather than a movement along the demand curve.

Answer: (B)

Verified step by step guidance

1. Understand that the demand curve shows the relationship between the price of a good and the quantity demanded by consumers.
2. Recognize that the assumption of ceteris paribus means 'all other things being equal' or 'holding other factors constant.'
3. Identify that in the context of the demand curve, ceteris paribus implies that factors other than price—such as consumer income, tastes, and prices of related goods—do not change.
4. This assumption allows us to isolate the effect of a change in price on the quantity demanded, which is represented as a movement along the demand curve.
5. If other determinants of demand change, the entire demand curve shifts, but under ceteris paribus, only movements along the existing demand curve occur due to price changes.