The field of economics frequently involves the study of cause and effect. By looking at the relationship between different two different factors, economists can make more accurate predictions. The Latin term “ceteris paribus” is a concept used to help explain certain economic theories. Learn more about the importance of ceteris paribus and how it’s used below.
Ceteris paribus definition
Ceteris paribus means “all other things being equal” in Latin. This concept can be used both to explain natural or scientific laws, as well as economic theories. For example, imagine that you’re testing the law of gravity. If you throw an apple from the top of a tree it will fall to the ground, provided there are no changes to normal circumstances or “ceteris paribus.”
However, what if a freak storm is passing through and a tornado picks up the apple? It might not fall to the ground, but this doesn’t mean it defies the law of gravity. Instead, it’s an example of things not being equal, or outside the norm.
Understanding the ceteris paribus meaning in economics
The ceteris paribus meaning in economics is concerned more with the effect of one variable on another. Economics involves numerous fluctuations according to outside influences, which is why the concept of ceteris paribus makes it easier to craft laws. If you can imagine a situation where there are only two variables, all other factors or fluctuations not included, you can more accurately consider cause and effect.
In this way, ceteris paribus offers economists a way to build and test their models, barring extraneous variables. The concept creates an instant system of conditions, keeping out the fluctuations that make economic modelling difficult.
Ceteris paribus examples
One example of ceteris paribus would be the economic law of supply. According to this law, an increase in price results in an increase in quantity supplied, when keeping others factors constant or ceteris paribus.
Using ceteris paribus, economists can focus solely on the two factors involved: price and supply. When producers are paid higher prices for a product, they will be willing to offer more of the product for sale by increasing production. While the real world is never as simple as this, the idea of ceteris paribus allows economists to look at the theoretical relationship between price and supply.
A secondary example could be an explanation of the cost of eggs. In the real world, there’s a multitude of factors that would influence this cost, including the availability and health of chickens, the property values of farmland, the growing popularity of veganism reducing demand, or the level of currency inflation. To keep it simple and look solely at supply vs. cost, an economist could apply ceteris paribus. With all other factors constant, a reduction in the supply of egg-laying hens would cause egg prices to rise.
Additional examples might include two-factor relationships between:
Currency supply and inflation
Interest rates and GDP
Minimum wage and unemployment
Rent control and housing supply
Importance of ceteris paribus
There are several benefits that help explain the importance of ceteris paribus in economics.
Offers a way to create a framework for testing economic models
Makes economic theories more scientific and less philosophical
Allows economists to explore multiple variables through testing hypotheses
On the other hand, this concept does have its clear limitations. While ceteris paribus enhances modelling and theoretical thinking, it doesn’t always reflect real world fluctuations. This can reduce the accuracy of economic models. Some critics claim that ceteris paribus allows economists to block out real-world problems or the impact of human nature on economic activity.
As we can see from the examples above, something as simple as the cost of eggs involves multiple factors which should be investigated in real-world modelling. However, it’s still important to understand ceteris paribus, which is used as the foundation of most economic laws.
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