DEFINITION
Ceteris Paribus, a Latin expression that means “all things being equal,” is used to explain the theory behind laws of economics and nature. It is used by experts to explain laws of nature and economics. If nothing else changes, it means that most of the times something will happen as a direct result of another thing.
The Key Takeaways
- Ceteris Paribusis Latin for “all things being equal.”
- Ceteris Paribus allows the study of causal effects between segregated variables.
- The ceteris parebus method can’t provide absolutes or certainty, but provides a basis of probabilities or tendencies.
Ceteris Paribus: Definition and examples
Ceteris paribus, the law of gravity says that a bathroom balance thrown from a window will fall. Gravity will send a bathroom scale crashing to the ground… as long as nothing changes.
What if it remained in the air because of a microburst? This powerful gust of air is an example that not all things are equal. Even though the bathroom scale did not fall this time, the law of gravity still applies.
Here’s an example. 1 According to the law of demand, oil price must drop in order to meet the demand.
Prices increased instead from $88.96 per barrel in fourth quarter 2007 to a peak of $122.24 per barrel in second quarter 2008. The oil prices dropped dramatically in the fourth quarter 2008, but began to rise again in the second half of 2009. 2
Ceteris Paribuswould suggest that you look at other factors that are unequal in this situation. You might have discovered that commodity traders feared to enter the stock exchange, so instead they tried to make money by bidding up the oil. Money flooded into the commodities market. The higher demand for oil futures has a major impact on oil price.
Ceteris Paribus: How it Works
Economical theory is heavily based on the concept ceteris parebus because there are so many variables that constantly change. It’s easy to understand the law of gravity because there are few other variables that can interfere. But this is not true in economics. Everything is constantly changing.
It is therefore harder to formulate economic laws than physical laws. Ceteris paribus makes economics simple. You can imagine a scenario where only two variables are changed.
Note:
Ceteris Paribus focuses on the effect of a change to the independent variable on the dependent variable.
A economist could use ceteris parebus in order to explain the law of demand. They would focus on the independent variable demand and the dependent variable price. The law of Demand states that “If demand falls– Ceteris Paribus — then prices will drop to meet demand.” This tells you that price and demand are the only variables in play. If all else is equal, prices will fall if demand also drops.
When people want a lesser quantity of a product or service, sellers will reduce their prices. Or, they could reduce production in order to lower supplies while keeping prices the same. They could update the product to stimulate interest. Apple uses this strategy to keep its prices high. Sometimes, manufacturers are unable to lower prices because of their high costs. In this case, they’ll accept less volume.
Note:
ceteris parebus is a concept that helps you understand the relationship between cause-and-effect.
The law of gravity is the same as the economic law of supply. You don’t think the law of gravitation was suspended when you throw your bathroom scale through the window. You check to see what else has changed.
The law of demand still applies if the demand falls and the prices rise, but it is important to know what else has changed.
