Ceteris Paribus

Published Jun 25, 2023

Definition of Ceteris Paribus

Ceteris Paribus is a Latin phrase that means “all other things being equal.” In economics, it is used to indicate that the effects of a particular change on a variable are being considered while holding all other factors constant. That means, when analyzing the relationship between two variables, all possible external factors that may influence the relationship are assumed to remain the same. This allows economists to focus solely on the impact of the specific change they wish to analyze.

Example

To understand the concept of ceteris paribus, let’s consider the relationship between the price of smartphones and the demand for them. If we simply look at the two variables without any other information, we may assume that the higher the price of smartphones, the lower the demand for them. However, other external factors like changes in consumer incomes, technological advancements, or the availability of new smartphone models can also influence the demand for smartphones.

Therefore, when analyzing the relationship between price and demand, we must use the ceteris paribus assumption to hold all external factors constant. For example, we can assume that there are no changes in consumer income or any other potentially influencing factors. When we hold these external factors constant, we can confidently draw conclusions about the impact of a price change on smartphone demand.

Why Ceteris Paribus Matters

Ceteris Paribus is a critical concept in economics, as it allows economists to isolate specific factors to analyze and gain insights into economic relationships. Without it, it would be much more challenging to understand the true relationship between two variables. For example, in the smartphone example given above, failing to account for the external factors could lead to incorrect assumptions about the relationship between the price and demand for smartphones. In short, ceteris paribus assumptions help identify the true causes of economic changes by simplifying the analysis, making it easier for economists to understand complex economic relationships.