what is ceteris paribus 
ceteris paribus literally holding other things constant is a latin phrase that is commonly translated into english as all else being equal a dominant assumption in mainstream economic thinking it acts as a shorthand indication of the effect of one economic variable on another provided all other variables remain the same constant in the scientific sense if we claim that one variable influences another ceteris paribus we are essentially controlling for the effects of some other variables investopedia katie kerpelunderstanding ceteris paribusin the fields of economics and finance ceteris paribus is often used when making arguments about cause and effect an economist might say raising the minimum wage increases unemployment increasing the supply of money causes inflation reducing marginal costs boosts economic profits for a company or establishing rent control laws in a city causes the supply of available housing to decrease of course these outcomes can be influenced by a variety of factors but using ceteris paribus allows all other factors to remain constant focusing on the impact of only one ceteris paribus assumptions help transform an otherwise deductive social science into a methodologically positive hard science it creates an imaginary system of rules and conditions from which economists can pursue a specific end put another way it helps the economist circumvent human nature and the problems of limited knowledge most though not all economists rely on ceteris paribus to build and test economic models in simple language it means the economist can hold all variables in the model constant and tinker with them one at a time ceteris paribus has its limitations especially when such arguments are layered on top of one another nevertheless it is an important and useful way to describe relative tendencies in markets 1applications of ceteris paribussuppose that you wanted to explain the price of milk with a little thought it becomes apparent that milk costs are influenced by numerous things the availability of cows their health the costs of feeding cows the amount of useful land the costs of possible milk substitutes the number of milk suppliers the level of inflation in the economy consumer preferences transportation and many other variables so an economist instead applies ceteris paribus which essentially says if all other factors remain constant a reduction in the supply of milk producing cows for example causes the price of milk to rise as an example take the laws of supply and demand economists say the law of demand demonstrates that ceteris paribus more goods tend to be purchased at lower prices or that if demand for any given product exceeds the product s supply ceteris paribus prices will likely rise in this situation the price of an item is the only variable that should change all else should remain ceteris paribus if only the price were to change we can appropriately forecast the outcome because of the laws of supply and demand in general economists and other social scientists will report how variables influence one another while holding all else constant so if we say that low unemployment is associated with higher inflation ceteris paribus it means holding everything else constant like gdp growth balance of trade money supply and so on however each of these other factors among others also can play into inflation we can also say the same thing about the minimum wage ceteris paribus raising the minimum wage is thought to lower employment as businesses cut costs but this also ignores many other social and political factors for example employees may work harder and be more productive with higher wages or better paid workers may spend more and increase aggregate demand there is often an inverse relationship between interest rates and the demand for borrowing this is because higher interest rates cause loans to become more expensive therefore ceteris paribus higher interest rates cause decreased demand for debt of course other factors consumer demand consumer preference consumer creditworthiness are all considers that may change the outcome of the statement however when all factors regarding the borrower are isolated higher interest rates mean higher loan costs which decreases demand there are a tremendous amount of factors that go into a unit s production this includes delivery of raw materials labor hours equipment availability ingredient pricing packing and delivery or distribution therefore when considering how an item may move throughout the supply chain process economists may make claims on outcomes assuming all other variables are constant for example ceteris paribus higher raw material prices will decrease manufacturing supply if companies don t increase their production budgets this claim does not consider labor hours packaging or delivery since economic variables can only be isolated in theory and not in practice ceteris paribus can only ever highlight tendencies not absolutes ceteris paribus and economic sciencetwo major publications helped move mainstream economics from a deductive social science based on logical observations and deductions into an empirically positivist natural science the first was l on walras elements of pure economics published in 1874 which introduced general equilibrium theory 2 the second was john maynard keynes the general theory of employment interest and money first published in 1936 which created modern macroeconomics 3in an attempt to be more like the academically respected hard sciences of physics and chemistry economics became math intensive variable uncertainty however was a major problem economics could not isolate controlled and independent variables for math equations there was also a problem with applying the scientific method which isolates specific variables and tests their interrelatedness to prove or disprove a hypothesis economics does not naturally lend itself to scientific hypothesis testing as does physics in the field of epistemology scientists can learn through logical thought experiments also called deduction or through empirical observation and testing also called positivism geometry is a logically deductive science physics is an empirically positive science unfortunately economics and the scientific method are naturally incompatible no economist has the power to control all economic actors hold all of their actions constant and then run specific tests no economist can even identify all of the critical variables in a given economy for any given economic event there could be dozens or hundreds of potential independent variables enter ceteris paribus mainstream economists construct abstract models where they pretend all variables are held constant except the one they want to test this style of pretending called ceteris paribus is the crux of general equilibrium theory 1as economist milton friedman wrote in 1953 theory is to be judged by its predictive power for the class of phenomena which it is intended to explain 4 by imagining all variables save one are held constant economists can transform relative deductive market tendencies into absolute controllable mathematical progressions human nature is replaced with balanced equations ceteris paribus drives supply and demand curve expectations the relationship between quantity and price can only be determined if the variables in question are influenced and the rest are held constant benefits of ceteris paribussuppose an economist wants to prove a minimum wage causes unemployment or that easy money causes inflation they could not possibly set up two identical test economies and introduce a minimum wage law or start printing dollar bills so the positive economist charged with testing their theories must create a suitable framework for the scientific method even if this means making very unrealistic assumptions the economist assumes buyers and sellers are price takers rather than price makers the economist also assumes actors have perfect information about their choices since any indecision or incorrect decision based on incomplete information creates a loophole in the model if the models produced in ceteris paribus economics appear to make accurate predictions in the real world the model is considered successful if the models do not appear to make accurate predictions they are revised this can make positive economics tricky circumstances might exist that make one model look correct one day but incorrect a year later some economists reject positivism and embrace deduction as the principal mechanism of discovery the majority however accept the limits of ceteris paribus assumptions to make the field of economics more like chemistry and less like philosophy as economists compile data from various scenarios static supply and demand charts are formed to devise a strategic plan of pricing supply or other economic factors as a single variable is tweaked a demand curve should be formed that allows for theoretical pricing application without having to go to market with those actual prices without ceteris paribus many scenarios that are analyzed simply would not be able to happen for example consider the situation where only variable along a supply chain changes and all other variables remain static and unchanged this situation would not able to occur in real life as so many aspects of the supply chain are uncontrollable therefore ceteris paribus allows for economists and analysts to devise scenarios that would otherwise not be able to exist criticisms of ceteris paribusceteris paribus assumptions are at the heart of nearly all mainstream microeconomic and macroeconomic models even so some critics of mainstream economics point out that ceteris paribus gives economists the excuse to bypass real problems about human nature 5 though this can be a benefit for theoretical application these scenarios also may never play out in the real world which contests how applicable some findings may be let s go back to the example of supply and demand one of the favorite uses of ceteris paribus every introductory textbook on microeconomics shows static supply and demand charts where prices are given to both producers and consumers that is at a given price consumers demand and producers supply a certain amount this is a necessary step at least in this framework so that economics can assume away the difficulties in the price discovery process but prices are not a separate entity in the real world of producers and consumers rather consumers and producers themselves determine prices based on how much they subjectively value the good in question versus the quantity of money for which it is traded economists admit these assumptions are highly unrealistic and yet these models lead to concepts such as utility curves cross elasticity and monopoly antitrust legislation is actually predicated on perfect competition arguments the austrian school of economics believes ceteris paribus assumptions have been taken too far transforming economics from a useful logical social science into a series of math problems 5financial consultant frank shostak wrote that this supply demand framework is detached from the facts of reality 6 rather than solving equilibrium situations he argued students should learn how prices emerge in the first place he claimed any subsequent conclusions or public policies derived from these abstract graphical representations are necessarily flawed like prices many other factors that affect the economy or finance are continuously in flux independent studies or tests may allow for the use of the ceteris paribus principle but in reality with something like the stock market one can never assume all other things being equal there are too many factors affecting stock prices that can and do change constantly you can t isolate just one as nice as a black and white world would be the truth is there are too many variables tied to human nature humans are naturally unpredictable and act in irrational ways though economic laws may make sense there are situations in which people don t do what is theoretically the best for them to do in these cases items like the law of supply and the law of demand may be broken causing any analysis to falter employs a scientific method approach to solving for variablesuses positive economics that can test theories