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Ceteris Paribus

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ceteris paribus

The quantity demanded will rise, ceteris paribus, when prices fall.

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Ceteris Paribus:

Ceteris paribus basically means "all other things being equal." It is a Latin phrase used primarily to clarify a basic assumption. It's very helpful because it can explain the difference between generalizations and laws of nature. Both generalizations and laws of nature happen most of the time, but not all the time. The difference is you can confidently state that laws of nature are still universally true, even though they don't happen 100% of the time, as long as all other things are being held constant.

However, there is some debate over whether ceteris paribus is really useful. That's because it can't really be tested. In other words, it's rare to find a situation where everything else really can be held constant in the real world. Nevertheless, ceteris paribus is still used to explain the theory behind laws of nature. (Source: Stanford Encyclopedia of Philosophy, Ceteris Paribus, March 14, 2011)

Ceteris Paribus Used in Economics

Ceteris Paribus is used extensively in economics to explain important relationships between two variables. It's very helpful to isolate just two variables because economics is so complex. For example, an economist might explain the law of demand by saying "If demand drops, then prices will fall to meet demand ceteris paribus. This lets you know that the only two variables that are being discussed are price and demand. If demand falls, and prices go up, then you know that all other things are not equal.

Of course, in the real world all other things are never equal. However, using the concept of ceteris paribus allows you to understand the theoretical relationship of cause and effect. The economic law of demand is like the physical law of gravity. If someone jumps out the window, and floats, you don't assume the law of gravity has been suspended. You look for what else has changed. Similarly, if demand drops, and prices go up, the law of demand is still operable. You now know to look for the other things that are no longer equal.

Here's a real world example. Thanks to the recession, demand for oil dropped. It declined from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. The law of demand says that oil prices should drop to meet demand. Instead, prices increased from $87.79 to $110.21 a barrel during that same time span.

Thanks to your understanding of ceteris paribus, you would now look to find out what other things were unequal. You would have found that commodities traders, afraid to enter the stock market, were now trying to gain profit by bidding up the price of oil. There was an influx of money into commodities markets. (For more, see What Makes Oil Prices So High?)

Pronunciation

It's pronounced like "se-ter-es pa-re-bes." If that doesn't help, just think of it like you're saying this sentence fast: "Setter is pear a bus." Regardless of how you pronounce it, few people outside of economics will know what you are saying. If you're at a cocktail party, or hanging out with friends, just say "all other things being equal." Article updated June 28, 2013

 

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