What Does Ceteris Paribus Mean?
Ceteris paribus is a Latin phrase, and it means “all other things being equal.” It is often used by experts in order to explain the theories behind laws of nature and economics. Ceteris paribus means that if nothing else changes, something will occur as the result of something else.
The phrase ceteris paribus is pronounced “seh·tr·uhs peh·ruh·buhs.” You can think of it like you’re saying this phrase quickly: “Setter is pair a bus.”
Ceteris Paribus: Definition and Examples
According to the law of gravity, an item thrown out of a window will fall to the ground, ceteris paribus. Gravity will make the item plummet to the ground as long as nothing else changes.
But consider what might happen if a microburst kept the item hovering in the air. A powerful gust of wind is an example of all other things not being equal. However, the law of gravity is still valid, even though the item didn’t fall to the ground in this case.
Here’s a real-world example: During the Great Recession, oil demand dropped from 87.8 million barrels per day during the fourth quarter of 2007 all the way to 84.2 million barrels per day within the second quarter of 2009. According to the law of demand, oil prices should drop to meet demand. But instead, prices rose. They went from $88.67 per barrel in the fourth quarter of 2007 up to $122.24 a barrel within the second quarter of 2008. Then, in 2008’s fourth quarter, prices fell drastically. They began to rise once again during the second quarter of 2009. (Related: See history of oil prices )
The phrase ceteris paribus indicates that you need to look for unequal factors in the situation at hand. If you did this in the example from the Great Recession explained above, you’d have discovered that commodities traders were attempting to profit by bidding up the price of oil because they were afraid to enter the stock market. This caused an influx of money in commodities markets. A large factor in high oil prices is the greater demand for oil futures.
How Ceteris Paribus Works
In economics, ceteris paribus is used frequently because there are so many constantly changing variables. In contrast, the law of gravity is simple to understand because it’s rare that something else intervenes. With economics, everything is always changing, which makes it more challenging to create laws of economics than it is to create physical laws. The use of the phrase ceteris paribus makes economics seem simpler by allowing you to imagine a situation where only two variables can change. In other words, ceteris paribus helps you focus on the ways the dependent variable is affected by a change in the independent variable.
The law of demand could be explained by an economist through the use of ceteris paribus. The economist could then focus on demand as the independent variable and price as the dependent variable. According to the law of demand, when demand drops–ceteris paribus–then prices will drop to meet demand. The use of ceteris paribus helps you understand that the only two variables of concern here are price and demand. So long all other things are equal, prices will drop if demand drops.
When people want less of a good or service, sellers lower their prices. Or, rather than lowering prices, sellers might decrease manufacturing in order to lower supply and keep prices steady. Another option is to stimulate demand by updating the product, which is a technique used by Apple to maintain its high prices. In some cases, manufacturers are unable to lower prices because their costs are too high. In this type of situation, manufacturers often accept a lower volume.
It’s rare, if ever that all other things are equal in the real world. However, using the concept of ceteris paribus helps you understand how cause and effect are related in a theoretical sense.
The physical law of gravity is similar to the economic law of demand. When you throw something out the window, and it comes right back at you, you don’t assume that the law of gravity was suddenly suspended. Instead, you look to see what else changed.
In a similar sense, the law of demand is still working even if demand drops while prices go up. You know you need to take a look at the other things in the situation that are no longer equal.
- Ceteris paribus is a Latin phrase. It means “all other things being equal.”
- Ceteris paribus helps you to study cause and effect relationships between segregated variables.
- The concept of ceteris paribus doesn’t predict certainties or absolute outcomes. Instead, it provides a base knowledge of probabilities and tendencies.
- To explain economic behavior, economists may choose to simplify things by isolating two or three variables while assuming all others are constant, unchanging, or in a state of ceteris paribus.