The Concept of Ceteris Paribus in Economics

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  • 0:01 Definition of Ceteris Paribus
  • 0:22 Why Is It Important in…
  • 2:54 Example of Ceteris Paribus
  • 4:56 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn what ceteris paribus means and why it is so important in economics. Find out how it helps us simplify and understand the relationship between different economic variables and forces. See some easy examples to help drive home its importance.

Definition of Ceteris Paribus

To understand the law of demand, the law of supply, and many other important economic concepts, it's important that you first understand the term ceteris paribus. Ceteris paribus is the commonly used Latin phrase meaning 'all other things remaining constant.' When using ceteris paribus in economics, it is often safe to assume that all other variables, except those under immediate consideration, are held constant.

Why Is It Important in Economics?

The concept of ceteris paribus is important in economics because, in the real world, it's usually hard to isolate all the different variables that may influence or change the outcome of what you are studying and how an individual might make a decision. It's used in economics to rule out the possibility of other factors changing, which may have an impact on the outcome or decision-making process of individuals.

For example, in economics, we may say that an increase in the price of beef will decrease the quantity demanded for beef. We often add the phrase or assume, 'all else constant,' at the end. Why, you might ask? We know from the law of demand that if the price of beef goes up, less beef will be demanded, all else constant. Now assume we take away the phrase, 'all else constant.' It now becomes extremely difficult to study the relationship between price and quantity demanded. We open up the entire world to known and unknown factors that may also affect the demand for beef.

What if the price of pork or chicken went down? Would some people buy less beef and substitute more pork and chicken? Certainly. What if a new study came out linking red meat to high rates of cancer or diabetes? Could that alone affect the demand for beef? Certainly. How about if the beef industry simply increased advertisements about the benefits of eating red meat? Could a large population increase affect the price and demand for beef? Again, the answers are: certainly!

I give you all of those other possibilities to show you that if you don't include or assume the phrase, 'all else constant,' in economics, it can be almost impossible to identify the true effect of one variable on another. Or, in this case, the simple relationship between a price change for beef and the corresponding change in quantity demanded for beef.

In the real world, it may be a combination of several things affecting the demand for beef. But to understand the influence of each one of those factors on price or quantity demanded, we must ignore all the other possibilities. It's only then that we can see how each variable affects the other without interference of other outside forces.

Examples of Ceteris Paribus

Let's look at a few examples to really drive home the importance of ceteris paribus, 'all else constant.' Say over a period of five years, the price of automobiles rises and so does the number of vehicles sold. That seems to violate the law of demand. The law of demand would have us believe that if the price of automobiles rose, the number of vehicles sold should have decreased.

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