What Is Ceteris Paribus?

Ceteris paribus, literally "holding other things constant," is a Latin phrase that is commonly translated into English as "all else being equal."

A dominant assumption in mainstream economic thinking, it acts as a shorthand indication of the effect of one economic variable on another, pro🦹vided all other variables remain the same (constant). In th𝓡e scientific sense, if we claim that one variable influences another, ceteris paribus, we are essentially controlling for the effects of some other variables.

Understanding Ceteris Paribus

In the fields of economics and finance, ceteris paribus is often used when making arguments about cause and effect. An economist might say raising the 澳洲幸运5开奖号码历史查询:minimum wage increases unemployment, increasing the 澳洲幸运5开奖号码历史查询:supply of money causes 澳洲幸运5开奖号码历史查询:inflation, reducing 澳洲幸运5开奖号码历史查询:marginal costs boosts economic profits for a company, or establishing rent control laws in a city causes the supply of availaꦦble housing to decrease. Of course, ꦯthese outcomes can be influenced by a variety of factors, but using ceteris paribus allows all other factors to remain constant, focusing on the impact of only one.

Ceteris paribus assumptions help transform an otherwise deductive 澳洲幸运5开奖号码历史查询:social science into a methodologically positive "hard" science. It creates an imaginary system of rules and conditions fr𓂃om which economists can pursue a specific 🎐end. Put another way; it helps the economist circumvent human nature and the problems of limited knowledge.

Most, though not all, economists rely on ceteris paribus to build and test economic models. In simple language, it means the economist can hold all variables in the model constant and tinker with them one at a time. Ceteris paribus has its limitations, especially when such arguments are layered on top of one another. Nevertheless, it is an important and useful way to describe relative tendencies in markets.

Applications of Ceteris Paribus

Suppose that you wanted to explain the price of milk. With a little thought, it becomes apparent that milk costs are influenced by numerous things: the availability of cows, their health, the costs of feeding cows, the amount of useful land, the costs of possible milk 澳洲幸运5开奖号码历史查询:substitutes, the number of milk suppliers, the level of inflation in the economy, consumer preferences, transportation, and many other variables. So an economist instead applies ceteris paribus, which essentially says if all other factors remain ♏constant, a reduction in the supply of milk🍌-producing cows, for example, causes the price of milk to rise.

Supply and Demand

As an example, take the 澳洲幸运5开奖号码历史查询:laws of supply and demand. Economists say the law of demand demonstrates that ceteris paribus, more goods tend to be purchased at lower prices. Or that, if demand for any given product exceeds the product's supply, ceteris paribus, prices will likely rise. In this situation, the price of an item is the only variable that should change. All else should remain ceteris paribus. If only the price were to change, we can appropriately forecast the outcome because of the laws of supply and demand.

Macroeconomics/GDP

In general, ec💦onomists and other social scientists will report how variables influence one another while holding all else constant. So, if we say that low unemployment is associated with higher inflation, ceteris paribus, it means holding everything else constant like GDP growth, balance of trade, money supply, and so on. However, each of these other factors, among others, also can play into i♒nflation.

Minimum Wage

We can also say the same thing about the minimum wage: ceter🔴is paribus, raising the minimum wage is thought to lower employment as businesses cut costs. But this also ignores many other social and political factors. For example, employees may work harder an♈d be more productive with higher wages. Or, better-paid workers may spend more and increase aggregate demand.

Interest Rates

There is often an inverse relationship between interest rates and the demand for borrowing. This is because higher interest rates cause loans to become more expensive. Therefore, ceteris paribus, higher interest rates cause decreased demand for debt. Of course, other factors (consumer demand, consumer preference, consumer creditworthiness) are all considers that may change the outcome of the statement. However, when all factors regarding the borrower are isolated, hi🔥gher interest rates mean higher loan costs which decreases demand.

Supply Chain

There are a tremendous amount of factors that go into a unit's production. This includes delivery of raw materials, labor hours, equipment availability, ingredient pricing, packing and delivery, or distribution. Therefore, when considering how an item may move throughout the supply chain process, economists may make claims on outcomes assuming all other variables are constant. For example, ceteris paribus, higher raw material prices will decrease manufacturing supply if companies don't increase their production budgets. This claim does not consider labor hours, packaging, or delivery.

Ceteris Paribus and Economic Science

Two major publications helped move mainstream economics from a deductive social science based on logical observations and deductions into an empirically positivist natural science. The first was Léon Walras' Elements of Pure Economics, published in 1874, which introduced general equilibrium theory. The second was 澳洲幸运5开奖号码历史查询:John Maynard Keynes' The General Theory of Employment, Interest, and Money, first published in 1936, which created modern 澳洲幸运5开奖号码历史查询:macroeconomics.

In an attempt to be more like the academically respected "hard sciences" of physics and chemistry, economics became math-intensive. Variable uncertainty, however, was a major problem; economics could not isolate controlled and independent variables for math equations. There was also a problem with applying the scientific method, which isolates specific variables and tests their interrelatedness to prove or disprove a hypothesis.

Economics does not naturally lend itself to scientific 澳洲幸运5开奖号码历史查询:hypothesis testing as does physics. In the field of epistemology, scientists can learn through logica𒅌l thought experiments, also called deduction, or through empirical observation and testing, also called positivism. Geometry is a logically deductive science.

Physics is an empirically positive science. Unfortunately, economics and the scientific method are naturally 𒈔incompatible. No economist has the power to control all economic actors, hold all of their actions constant, and then run specific tests. No economist can even identify all of the critical variables in a given economy. For any given economic event, there could be dozens𒊎 or hundreds of potential independent variables.

Enter ceteris paribus. Mainstream economists construct abstract models where they pretend all variables are held constant, except the one they want to test. This style of pretending, called ceteris paribus, is the crux of general equilibrium theory.

As economist 澳洲幸运5开奖号码历史查询:Milton Friedman wrote in 1953, "theory is to be judged by its predictive power for the class of phenomena which it is intended to 'explain.'" By imagining all variables save one are hel🌠d constant, economists can transform relative deductive market tendencies into a🎉bsolute controllable mathematical progressions. Human nature is replaced with balanced equations.

Benefits of Ceteris Paribus

Uses Scientific Method Approach

Suppose an economist wants to prove a minimum wage causes unemployment or that easy money causes inflation. They could not possibly set up two identical test economies and introduce a minimum wage law or start printing dollar bills. So the positive economist, charged with testing their theories, must create a suitable framework for the scientific method, even if this means making very unrealistic assumptions. The economist assumes buyers and sellers are 澳洲幸运5开奖号码历史查询:price-takers rather than 澳洲幸运5开奖号码历史查询:price-makers.

Leverages Perfect Information

The economist also assumes actors have perfect information about their choices since any indecision or incorrect decision based on incomplete information creates a loophole in the model. If the models produced in ceteris paribus economics appear to make accurate predictions in the real world, the♕ model is considered successful. If the models do not appear to make accurate predictions, they are revised.

Employs Positive Economics

This can make positive economics tricky; circumstances might exist that make one model look correct one day but incorrect a year later. Some economists reject po൲sitivism and embrace deduction as the principal mechanism of discovery. The majority, however, accept the limits of ceteris paribus assumptions, to make the field of economics more like𝓰 chemistry and less like philosophy.

Enables Price Discovery

As economists compile data from various scenarios, static supply and demand charts are formed to devise a strategic plan of prici🧸ng, supply, or other economic factors. As a single var✤iable is tweaked, a demand curve should be formed that allows for theoretical pricing application without having to go to market with those actual prices.

Overcomes Impossible Scenarios

Without ceteris paribus, many scenarios that are analyzed simply would not be able to happen. For example, consider the situation where only variable along a supply chain changes and all other variables remain static and ไunchanged. This situation would not able to occur in real life as so many aspects of the supply chain are uncontrollable. Therefore, ceteris paribus allows for economists and analysts to ♛devise scenarios that would otherwise not be able to exist.

Criticisms of Ceteris Paribus

Overcomes Impossible Scenarios

Ceteris paribus assumptions are at the heart of nearly all mainstream microeconomic and macroeconomic models. Even so, some critics of mainstream economics point out that ceteris paribus gives economists the excuse to bypass real problems about human nature. Though thi✤s can be a benefit for theoretical application, these scenarios also may never play out in the real world which contests how applicable some findings 🍌may be.

Let's go back to the example of supply and demand, one of the favorite uses of ceteris paribus. Every introductory textbook on 澳洲幸运5开奖号码历史查询:microeconomics shows static supply and demand charts where prices are given to both producers and consumers; that is, at a given price𓆉, consumers demand and producers supply a certain amount.

This is a necessary step, at least in this framework, so that economics can assume away the difficulties in the 澳洲幸运5开奖号码历史查询:price-discovery process. But prices are not a separate entity in the real world of producers and consumers. Rather, consumers and producers themselves determine prices based on 🍨how much they subjectively value the good in ques🔯tion versus the quantity of money for which it is traded.

Dilutes Logical Value

Economists admit these assumptions are highly unrealistic, and yet these models lead to concepts such as utility curves, cross elasticity, and monopoly. 澳洲幸运5开奖号码历史查询:Antitrust legislation is actually predicated on 澳洲幸运5开奖号码历史查询:perfect competition arguments. The 澳洲幸运5开奖号码历史查询:Austrian school of economics believes ceteris paribus assumptions have been taken too far, transforming economics from a useful, logical social science into a series of math problems.

May Overshadow What Should Be Analyzed

Financial consultant Frank Shostak wrote that this supply-demand framework is "detached from the facts of reality." Rather than solving 澳洲幸运5开奖号码历史查询:equilibrium situations, he argued, students should learn how prices emerge in the first place.♉ He claimed any subsequent conclusions or public pꦫolicies derived from these abstract graphical representations are necessarily flawed.

Like prices, many other factors that affect the economy or finance are continuously in flux. Independent studies or tests may allow for the use of the ceteris paribus principle. But in reality, with something like the 澳洲幸运5开奖号码历史查询:stock market, one can never assume "all other things being equal." There are too many factors affecting stock prices that can and do change constantly; you can't isolate just on🌳e.

Ignores Human Nature and Emotions

As nice as a black and white world would be, the truth is there are 澳洲幸运5开奖号码历史查询:too many variables tied t𒉰o human ꧙nature. Humans are naturally unpredictable and act in irrational ways. Though economic laws may make sense, there are situations in which people don't do what is theoretically the best for them to do. In these cases, items🧔 like the law of supply and the law of demand may be broken, causing any analysis to falter.

Ceteris Paribus vs. Mutatis Mutandis

While somewhat similar in assumption aspects, ceteris paribus is not to be confused with 澳洲幸运5开奖号码历史查询:mutatis mutandis, translated as "once necessary changes have been made.” It is us🐻ed to acknowledge that a comparison, such as thꦫe comparison of two variables, requires certain necessary alterations that are left unsaid because of their obviousness. 

In contrast, ceteris paribus excludes any and all changes except for those that are explicitly spelled out. More specifically, the phrase mutatis mutandis is larg൲ely encountered when talking about counterfactuals, used as a shorthand to indicate initial and derived chan🐟ges that have been previously discussed or are assumed to be obvious.

The ultimate difference between these two contrasting principles boils down to 澳洲幸运5开奖号码历史查询:correlation versus causation. The principle of ceteris paribus facilitates the study of the causal effect of one variable on another. Conversely, the principle of mutatis mutandis facilitates an analysis of the correlation between the effect of one variable on another, while other variables change at will.

The Bottom Line

Ceteris paribus is a broad term that defines what variables are changing or what variables are remaining th🐷e same in a given situation. Often, to isolate only one variable, economists cite ceteris paribus to clarify that their assumptions on a given outcome are only valid if all other variables are remaining the same. Though ceteris paribus is truly unlikely due to the complexity of macroeconomic factors, it may still be useful in testing variables and determining what causes outcomes.