Ceteris Paribus

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Definition of Ceteris Paribus:

Ceteris paribus is a Latin term meaning “other things being equal,” or all other variables are held constant.

Detailed Explanation:

Economists use ceteris paribus frequently when discussing models or principles. The ceteris paribus assumption restricts the discussion to only those variables under consideration. Adding more than one variable may add confusion and result in the wrong conclusion, since it is hard to determine which variable caused the result. For example, assume we are analyzing the law of demand and want to see how a reduction in the price of hamburger meat may impact the quantity of hamburger purchased. To determine the true impact, all other variables must be kept constant. This includes the price of substitute goods like chicken. Not doing so may result in the wrong conclusion. Assume the price of hamburger drops $0.50 per pound. The price of chicken increases $0.25 per pound. The quantity of hamburger purchased at a local grocery store increases by 1,000 pounds. How much of the increase in sales was due to the decrease in the price of hamburger meat, and how much resulted from people substituting hamburger for chicken because of the increase in the price of chicken? It is difficult to determine the answer. The store would need to hold the price of chicken (and all other meats) constant to understand how sensitive sales of hamburger are to a change in the price of hamburger. This is what is meant by ceteris paribus. 

The economy is very complex. Hundreds of variables interact. Ceteris paribus, keeping all but the studied variable constant, helps clarify these and other economic relationships.

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