File ITR, invest & save upto
₹46,800 in taxes on the go
0% commission • Earn upto 1.5% extra returns
Reviewed by Jul 26, 2021| Updated on
Ceteris paribus is a Latin phrase meaning 'with other things that are same' or 'other things being equal or held constant'. A widespread assumption in the field of economics is that the phrase acts as a shorthand indication of the impact of one economic variable on another, provided that all other variables remain constant or same.
It assists in isolating multiple independent variables influencing a dependent variable. Casual relationships among economic variables are difficult to be isolated in the real world since most economic variables are inter-dependant by more than one cause. Still, the models often depend on an assumption of independent variables.
For instance, in the real world, it would be nearly not possible to ascertain the causal relationship between the price of the goods (dependent variable) and the quantity demanded (independent variable) while also taking into account other variables that affect the price.
Let us see few examples of the application of Ceteris Paribus.
The price of meat may rise if more people are willing to purchase it. In turn, the producers may sell it for a lower price if fewer people want it. But prices of meat may also fall if we assume that the price of land to raise chickens also drops.
It makes it difficult to assume that it was only the demand that caused the price change. However, if other variables are kept constant under the ceteris paribus assumption, it is simpler to describe the relationship between only the price and demand. The variables include the prices of similar goods, production costs, and labour costs.
Another example of its application is that ceteris paribus is often used when making arguments about a cause and its effect. An economist might claim that increasing the minimum wage will, in turn, increase unemployment. It will cause a rise in the supply of money, causing inflation. In turn, it reduces the marginal costs that boost economic profits for a company.
Ceteris paribus is also used in other areas, such as psychology and biology. These fields have ceteris paribus rule that is assumed to be true only under normal circumstances.