When studying economics, we will often hear the term ceteris paribus. Ceteris paribus is a Latin phrase that means “all things being equal” or “all else being equal” in English.

 

As a dominant assumption in mainstream economic thought, this phrase briefly indicates the effect of one economic variable on another, assuming that all other variables remain the same (constant).

 

To better understand ceteris paribus, its application, its benefits, and how it works, check out the full review below!

 

What is Ceteris Paribus?

Ceteris paribus is a common concept used to construct cause-and-effect arguments in economics and finance.

 

For example, an economist may state that an increase in the minimum wage will increase the unemployment rate, and an increase in the money supply will cause inflation.

 

Not only that, but a decrease in operating costs will also increase a company’s profits, or implementing rent control regulations in a city will reduce the available housing supply.

 

While other factors could influence these results, using ceteris paribus allows the assumption that all other factors remain constant so that attention can be focused on the influence of just one factor.

 

As in economics and other social sciences, ceteris paribus is often used to facilitate the understanding of how one factor affects another while ignoring the influence of other factors that may exist in a given situation.

 

This concept is useful because many variables can affect real-life events or outcomes.

 

Ceteris Paribus Application

 

 

Ceteris paribus is commonly used to explain supply and demand, macroeconomics, minimum wage, interest rates, and supply chains.

 

For example, in everyday life, it can be stated that “if the price of a good increases, the demand for the good will decrease.”

 

This assumption creates a cause-and-effect relationship between the price and demand of a good while ignoring other factors.

 

Other factors include known and unknown factors that can affect the relationship between price and demand, such as tastes, income, and the price of other goods.

 

In ceteris paribus, these factors are assumed to be fixed or unchanging, so the calculation only focuses on one effect because of this assumption.

 

Another example of the application of ceteris paribus is if the money supply increases it will cause inflation. If the minimum wage is increased, then unemployment will also increase.

 

But, of course, all these assumptions are based on ignoring other factors. On the other hand, economists use ceteris paribus to design and test economic models.

 

Benefits of Ceteris Paribus

Applying the ceteris paribus assumption in measuring an economic indicator will provide several benefits or advantages. Here are some of the benefits that need to be known, among others:

 

1. Using the Scientific Method Approach

By utilizing the ceteris paribus assumption, economists can use the scientific method approach to prove a theory without conducting identical tests.

 

The scientific method approach involves creating an appropriate framework, making assumptions, and testing the theory according to the assumptions and framework.

 

2. Utilize Complete Information

If economic information is incomplete, the economic model created may have weaknesses. Ceteris paribus helps economists create economic models close to real-world reality. If the predictions are not accurate, then the model can be revised.

 

3. Estimating Impossible Scenarios

By utilizing ceteris paribus, economists can construct economic scenarios that may not happen in the real world. They can imagine impossible scenarios by analyzing scenarios that have happened before.

 

4. Improving Research Accuracy

Ceteris paribus can improve research accuracy by eliminating unimportant factors and focusing on significant variables contributing to economic calculations.

 

5. Simplifies Complicated Economic Analysis

Ceteris paribus allows the calculation and analysis of only the variables to be studied. Thus, the total number of variables is reduced, increasing the effectiveness and efficiency of the analysis.

 

How Ceteris Paribus Works

Quoting economicsonline.co.uk, in economics, ceteris paribus is often used because so many variables are constantly changing. In contrast, the law of gravity is easy to understand because it rarely happens that something else intervenes.

 

In economics, everything is always changing, making it more difficult to create economic laws than physical ones.

 

The phrase ceteris paribus makes economics seem simpler by allowing us to imagine a situation where only two variables can change.

 

In other words, ceteris paribus helps us focus on how the dependent variable is affected by changes in the independent variable.

 

An economist can explain the law of demand using ceteris paribus. The economist can focus on demand as the independent variable and price as the dependent variable.

 

According to the law of demand, when demand falls-ceteris paribus-, prices will fall to meet demand.

 

The use of ceteris paribus helps us understand that only two variables are of concern here, namely price and demand. As long as all other things remain the same, prices will fall if demand falls.

 

When people want less of a good or service, sellers lower their prices. Or, instead of lowering prices, sellers might reduce production to lower supply and keep prices stable.

 

Another option is to stimulate demand by updating products, which Apple uses to maintain its high prices.

 

In some cases, manufacturers cannot lower prices because their costs are too high. In these situations, manufacturers often accept lower volumes.

 

Pros and Cons of Ceteris Paribus

 

 

Quoting masterclass.com, ceteris paribus is important in economics as it provides a fact-focused analysis of this social science. In that regard, it is important to understand that ceteris paribus has advantages and disadvantages. Here is the explanation.

 

Pros of Ceteris Paribus

Here are some of the advantages of ceteris paribus that you need to know:

 

• Scientific method: Ceteris paribus dictates that all variables are controlled, applying the scientific method to socioeconomic.
• Positive economics: Unlike normative economics, which focuses on value judgments, positive economics can test theories using ceteris paribus to make predictions that are expected to be accurate in the real world.
• Macroeconomics and microeconomics: Almost all major macroeconomic and microeconomic models use ceteris paribus, making them essential tools for those studying these social sciences.
• Price discovery: Ceteris paribus allows economists to create static supply and demand graphs and price frameworks. This framework shows the demand curve where ceteris paribus conditions remain constant.

 

Cons of Ceteris Paribus

There are some drawbacks to using the ceteris paribus law, mainly because it requires assumptions. Some of the drawbacks of this law include:

 

• Human nature: The ceteris paribus assumption ignores the impact of humans on economic trends and, therefore, ignores a very important aspect of the market.
• Pricing: Ceteris paribus helps in pricing at an early stage of production; however, real-life prices are ultimately determined by subjective value versus the price consumers will pay, making this initial step relatively unnecessary.
• Variable: Ceteris paribus focuses on one variable and its effect; however, in economics, there are many variables to consider, making it difficult to cover all possible independent variables.

 

5 Examples of the Application of Ceteris Paribus in Economics

 

The ceteris paribus methodology is helpful for economists studying the following, among others:

 

1. Supply chain

Ceteris paribus considers production factors, such as logistics, resources, competition, and buyer trends, to determine the price of goods.

 

For example, a bread seller observes the cost of ingredients, labor, packaging, distribution, competitors, economic inflation, and consumer trends.

 

Ceteris paribus dictates that if other factors remain the same, a decrease in the supply of bread will lead to an increase in price.

 

2. Law of supply and demand

In the law of demand, buyers demand less of an economic good when prices are high. The law of supply states that sellers will provide more of an economic good when prices are high.

 

The interaction of these two laws determines the actual market price and volume of the good. Ceteris paribus identifies, isolates, and tests the impact of independent variables that would affect these two laws and the causal factors in market supply and prices.

 

3. Gross Domestic Product

Economists use ceteris paribus to study GDP, assuming a fixed variable to determine its effect on the money market.

 

4. Interest rate

If interest rates rise (independent variable), then the demand for debt falls because the cost of borrowing increases (dependent variable).

 

5. Minimum wage

Economists use ceteris paribus to determine the potential effects of a minimum wage increase, including the possible outcome of fewer jobs if companies have to pay employees more.

 

Differences between Ceteris Paribus vs Mutatis Mutandis

Citing the masterclass.com page, ceteris paribus and mutatis mutandis are two economic laws that study the cause-and-effect relationship between specific variables. The differences between these two laws include:

 

• Number of variables: Mutatis mutandis is a Latin phrase that means “the necessary changes have already been made”. The term considers how all variables interact with each other, whereas ceteris paribus studies both the independent and dependent variables.
• Cause and effect: The purpose of mutatis mutandis is to understand the relationship between variables and how some variables change, whereas ceteris paribus focuses on understanding causality.
• Real-world model: Since mutatis mutandis analyzes multiple variables and their impact on each other, it is more complex and accurate in real-world predictions.
  Application: Mutatis mutandis is more often used in law than economics to compare two or more cases or contracts.

 

Economists use ceteris paribus to build and test models to analyze supply and demand, gross domestic product, and interest rates.

 

What does Ceteris Paribus have to do with the Law of Demand?

Quoting the ukmindonesia.id page, according to Investopedia, the Law of Demand is one of the basic concepts in economics which states that the amount of goods purchased is inversely proportional to their price.

 

The concept is in line with the definition of the Law of Demand taken from Wikipedia, which states that “The higher the price of an item, the less the amount of demand for that item.

 

Vice versa, the lower the price of a good, the greater the amount of demand for that good. *Ceteris paribus.

 

*) Ceteris paribus is the assumption that this law of demand only applies when circumstances or factors other than price do not change or are considered constant (fixed).

 

Conclusion

In conclusion, ceteris paribus is a very important tool in economic analysis. This concept allows researchers and analysts to isolate the effect of a variable without the interference of other variables that may change.

 

By assuming that “all other things remain the same”, ceteris paribus provides an understanding of the cause-and-effect relationship between economic variables.

 

However, it is important to use this ceteris paribus concept wisely. That is because, in the real world, there are rare circumstances where all factors other than one variable remain constant.

 

Therefore, while ceteris paribus can provide an easier understanding and focus to the analysis, we need to recognize that this assumption is idealistic, and the analysis results should be interpreted carefully.

 

For additional information, you can also read other interesting articles about the world of economics, such as fiscal and hawkish policies in finance and their impact on crypto only on INDODAX Academy.

 

Remember, to expand your understanding of blockchain technology, you are strongly encouraged to read the latest articles on INDODAX Academy.

 

INDODAX Academy presents a variety of materials, from basic concepts to more in-depth aspects related to blockchain technology. By reading various articles on INDODAX Academy, you can gain a deeper understanding of this technology, including its applications, and get the latest information about the crypto world.

 

Invest in Crypto Assets on INDODAX

Now you understand ceteris paribus, its application, benefits, and how it works.

 

Furthermore, if you are interested in investing in crypto assets, it is better if you first check the crypto coin rating. After checking your price, you can buy crypto assets on a trusted Indonesian crypto exchange, INDODAX.

 

For information, INDODAX is a leading platform as well as a pioneer in trading (buying and selling) crypto assets in Indonesia. Being a crypto asset trading platform that has proven its credibility, INDODAX continues to provide trusted services for investors.

 

INDODAX also provides easy access to the crypto asset market while ensuring the security of users’ transactions.

 

Start investing in crypto assets now on INDODAX!