What is a Ceteris Paribus?
Ceteris paribus, or “all else equal,” is a concept used by economists to make assumptions about the relationship between two specific variables — If they disregard all other possible economic variables.
Ceteris paribus is a Latin phrase that means "other things constant,” or the more casual, “all things being equal.” Economists can explore cause and effect relationships between independent and dependent variables — If all other factors remain the same. Economic models, like the laws of supply and demand, are examples of ceteris paribus arguments. They only focus on two factors and ignore all others. For instance, the law of demand says that when prices rise, people buy less, and when prices fall, people buy more — if all other factors stay the same. But in real life, other factors that aren't considered in ceteris paribus arguments contribute to peoples' buying decisions.
A common ceteris paribus argument is if the price of a product decreases, people will buy more of it, and vice versa. Based on this law, we'd expect that every time stuff got cheap, people would buy more of it, and every time stuff got expensive, people would buy less. But in the real world, this doesn’t always happen — especially with staple products like bread, potatoes, or rice. Staples are usually the most efficient food source and frequently consumed food. When prices are rising generally in an economy, people will tend to buy more of a staple product — because the increased price of the staple product makes it impossible to also afford a higher-priced product like beef or fish. (Thus they buy more of the staple product to fill in the gap.) This is often called Griffin’s paradox. Ceteris paribus arguments are blind to a lot of human-driven factors such as this.
Ceteris paribus is like a weather balloon...
Meteorologists try to predict the weather. But in real life, the weather is often too dynamic to predict even over the medium term. The economy is also unpredictable and made up of many random events. Like measuring all the forces affecting the weather, quantifying all economic forces can’t be done in an economic model. Meteorologists can observe and collect limited pieces of data with weather balloons, then combine weather balloon data to try and get a bigger picture. Economists, likewise, can study selected economic forces with ceteris paribus assumptions, then compile their findings to get a better view. There will always be events that balloons and ceteris paribus arguments can’t measure because of their limited range.
Ceteris paribus is a Latin phrase for “holding other things constant.” (” KA-ta-ris Pa-ri-boos” /ˌkɛtərɪs ˈparɪbʊs/ ) It’s a device used in economic modeling that allows economists to make assumptions about the relationship between two specific variables — If they disregard all other possible economic variables.
The economy is made up of countless forces, variables, and influences. The problem economics has always faced is that it can’t run controlled experiments in a lab like the physical sciences can. Economists realized that to prove any causal relationship between a dependent and independent variable, they had to ignore all other variables completely. By holding all other variables constant, they could isolate the variables they were studying and try to come up with some rules to understand the various parts of the economy.
A typical ceteris paribus example is to suppose that if prices decrease, all things being equal, demand quantity will increase. This assumes that if you go to the store and apples are 50% off, you’ll buy a bunch more apples. But this assumption can’t consider whether or not you like apples, or if last night’s news reported on a strain of E. coli on apple crops. Ceteris paribus models are simplistic, but they can highlight essential concepts.
Economists can’t use the scientific method like physics to prove causation. Instead, economists create their experiments by segregating those variables they wish to study the relationships of from all other economic forces — Isolating them from all other possible factors.
We see this in the laws of supply and demand, from which the demand and supply curves were derived. The law of demand, for example, has an inverse relationship between price changes and demand changes.
If prices decrease, ceteris paribus, consumers will buy more.
While this sounds plausible, anyone can imagine situations where price doesn’t carry as much weight. Natural disasters, food shortages, personal preference, lack of alternatives, successful advertising, social capital, and the latest iPhone release are all examples of this. In the law of demand, ceteris paribus looks at price and demand in a vacuum.
The law of supply states that there is a direct relationship between price and quantity supplied.
A decrease in price, ceteris paribus, decreases the quantity of supply.
This says that if products are selling at higher prices, then more products will be produced. If they are selling at lower prices, fewer products will be produced. But government subsidies can boost supply. Improved technology and access to inexpensive resources and labor can create economies of scale that increase supply. Improved supply chain management can increase supply, while scarcity of materials and a rise in the cost of borrowing can decrease supply. These different factors that affect supply aren’t considered in the law of supply.
Even though history has shown that the ceteris paribus assumption is not a perfect blueprint for economic policy, ceteris paribus is important in economics because the overwhelming number of interactions happening in the real world economy makes it difficult to talk about what causes what. Economists use modeling (simplified descriptions of reality) to try to explain aspects of the economy in a way that can help them identify trends. But they can’t create models without isolating independent and dependent variables to try and prove causation. Ceteris paribus allows them to do this.
Ceteris paribus is the heartbeat of the partial equilibrium theory (which analyzes market sectors) introduced by Alfred Marshall (Principals of Economics, 1890). Marshall realized that the more an issue is narrowed, the easier it is to handle — even if this means it doesn’t correspond as closely to real life. Marshall felt that by studying the economy bit by bit, and then combining partial solutions, economists could get a better grasp on the whole.
In microeconomics (the study of entity and individual economic behavior), partial equilibrium theory analyzes changes in equilibrium in market sectors by isolating them from other market sectors. It's related to the general equilibrium theory, which studies how markets affect each other and reach equilibrium simultaneously in macroeconomics (the study of large-scale economics).
Given that ceteris paribus may result in non-experimental data, it may still show some interrelational tendencies between economic forces. While not necessarily a rule book, it’s more like a travel guide.
Ceteris paribus laws raise many philosophical and scientific problems. Some of the common criticisms of ceteris paribus arguments are:
They exclude potential factors: For example, to say that an increase in demand leads to higher prices excludes things like price caps — government regulations that put a limit on how much suppliers such as utility and gas companies can charge.
They lack empirical content: Economist John Stuart Mill, (System of Logic, 1882) called this committing the fallacy of à dicto secundum quid ad dictum simpliciter (a type of hasty generalization fallacy) — when an ignored condition is necessary for the truth.
They aren’t testable: They aren’t strict enough to hold true in an unlimited range of possible situations. Twentieth-century economist Daniel Hausmann noted that “claims hedged with qualifications and ceteris paribus clauses (are) untestable and uninformative.”
They can’t be proven false: Whatever result economists come up with can’t necessarily be proven wrong. If things in the economy don’t turn out as they predicted, they can always say, “Ah, one of the variables that we ignored must have changed.”
The phrase mutatis mutandi is Medieval Latin, which in English means "with those things having been changed which need to be changed." It’s been called the opposite of ceteris paribus, in that it doesn’t isolate any variables.
Instead, it lets changes happen and then looks for economic effects when variables adjust. Ceteris paribus says all other variables outside (exogenous) of those we are studying for causation stay the same. Mutatis mutandis says changes are mutually understood, and all variables that may be affected may also change. Mutatis mutandi extends to the study of counterfactuals (conditional claims that are not factual) and possible alternate worlds by considering all possible outcomes.
Mutatis mutandi is more often used in law than in economics. But it’s interpreted differently. In contract law, it means minor details, such as names and dates, might change, but everything else will stay the same. It’s typically seen when two cases or contracts are compared that only need small changes that don’t affect the core topic, such as new agreements similar to prior agreements.
What is the FICA Tax?
The Federal Insurance Contributions Act (FICA) is a law mandating a type of tax that both employers and employees pay to help fund Social Security and Medicare.
What is an Itemized Deduction?
An itemized deduction is an expense that you can claim on your taxes to reduce your taxable income based on a qualified purchase or expense.
What is a Limit Order?
A limit order is an order to buy or sell a stock at a set price or better — But there is no guarantee the order will be filled.
What is a Deferred Compensation
Deferred compensation is when an employer withholds part of an employee’s pay from their paychecks to set aside for use at a later date.
What is Taxable Income?
Taxable income is the share of total income (aka gross income) in one year that is used to calculate the taxes owed to the government.