Definition:
Ceteris Paribus is a Latin word, which means, “Holding other things constant” and commonly known as “all else being equal”. It is an assumption in the field of economics, which defines that it acts as an indication of one economic variable on the other and assumes that all other variables, remains same. In economics and finance, it considers using when making arguments on causes and effects. Economists usually discussceteris Paribas when raising minimum wage increases level of unemployment. Increasing supply of money causes inflation. Economists can also say ceteris paribus when marginal cost is reduced which gives firms huge profits. Establishing rent control laws in a city tends to lowering supply of available houses in the area.
The economists in order to build and test economic models use Ceteris Paribus. Economists tend to hold all variable in the model as constant and assess with them one at a time. It has some limitations, such as arguments layered on top of one another.
It is an extension of scientific modeling. The method builds on isolating, identifying and testing impact of an independent value on a dependent variable. It highlights tendencies but not the absolutes as because it can be isolated in theory but not in practice.
When the economists want to prove minimum wage causes unemployment or heavy outflow of money causes inflation then ceteris paribus is useful in this context. If the positive economists take charge in testing the theories then he will create suitable framework even if he wishes to take any unreal specification then also it is considered. In this case, economists consider buyer and seller as price taker instead Aof price makers. Price takers are those who is a company or an individual who accepts all the price in the market. Every economic participant in the market consider as price makers in case of perfect competition. As all the companies sell same kind of product in the market and there are no barriers to entry or exit in the market. As all buyers have full information in the market, the marketers keep the prices equal.
Importance of Ceteris Paribus in economics
Ceteris Paribus is to scientific enquiry, where scientists try to screen out factors, which interlink a relation of interest. Operation description ignores the known and unknown factors, which influence the relationship between price and quantity. Factors, which are intentionally, ignored are- price of the substitute goods, change in the level of aversion and change in the level of overall demand of the goods.
Example of Ceteris Paribus
When price of milk is explained, it include many factors to calculate the price of the milk; such as the number of milk suppliers, inflation level in the market, consumer preferences and transportation and many others.
Other example, law of supply and demand; according to economists law of demand is ceteris paribus, higher number of goods shall be purchase at much lower price. Complicated nature of economics makes it difficult to understand but Ceteris Paribus makes it clear easily.
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