Ceteris Paribus

Ceteris paribus means all external factors acting on a variable subject are assumed to remain unchanged/constant while testing its relationship with other variable subjects. Economists use it for confirmation of a theory in economics.  It measures the cause and effect in a relationship between two separate economic variables using probability and tendency knowledge.Ceteris paribus helps most economists study one relationship mechanism and its corresponding cause between two variables. As a result, experts use it to explain many economic concepts easily. Moreover, it also helps analyze many economic situations in the real world via exaggerated assumptions. In economics discussions, Juan de Medina and Luis de Molina first used it in the sixteenth century. It is the most widely used and dominant concept in economics and finance for analysis of economic theory. It cannot predict anything with certainty or absoluteness. However, it provides a base for the possible way to determine causal relations. Ceteris Paribus or Caeteris Paribus is a Latin phrase that means ‘other conditions being constant’ or ‘all else being equal’. It helps in understanding the cause-and-effect relationship between two variables. In economics discussions, Juan de Medina and Luis de Molina first used it in the sixteenth century. It is the most widely used and dominant concept in economics and finance for analysis of economic theory. It cannot predict anything with certainty or absoluteness. However, it provides a base for the possible way to determine causal relations.In other words,  it assumes that two variables have a cause-and-effect relationship only when the external factors, which might affect the variables, remain the same. In economics, all the variables are constantly changing; this concept helps to understand any economic or financial mechanisms. Economists and financial analysts find it difficult to factor in all the dynamic variables together simultaneously and then study the variables’ relationship. Studying such relationships leads to chaos and complexity in the calculations. Moreover, this concept points out some important factors. Example includes price, that directly impacts the connection between two variables like supply and demand.

Here is a ceteris paribus practical example to the concept

When the price of a certain mobile phone, for example, iPhone manufactured by Apple Inc., decreases, it is assumed that its demand will increase more in the market. So, if a customer goes to an Apple store and finds that iPhones have 50% off on their base price, then one may buy more than one iPhone.

However, the above ceteris paribus assumption does not consider whether everyone can afford iPhones even at a lower price, whether everyone likes iPhones, and whether everyone has the actual need for a new iPhone in their lives.

In the same way, economists predict that if the price of pizza increases, other variables remain constant, and buyers will demand a lesser quantity of pizza. Here, if we consider some unknown factors like if the buyers like to consume pizza and if it gives them a high utility, then they will not give up on the consumption even if prices increase.

FACULTY ; SOCIAL SCIENCE
DEPARTMENT; PUBLIC ADMINISTRATION & LOCAL GOVERNMENT
REG NO ; 10510689BE
COURSE; ECO 101 ( PRINCIPLE OF ECONOMICS )