Ceteris Paribus (Latin for “all else unchanged”) is a term used in a hypothetical situation to help explain or theorize a certain change where the aim is to isolate one or two variables by stating that the rest remains unchanged in order to explain how changes in one affect the other.
In Finance and Economics, the term is used to specify the situation where all other variables apart from the ones in use remain constant. As the economic variables can only be isolated theoretically and not in practice, ceteris paribus can only show trends rather than absolute facts.
For example, if anyone wants to explain the retail price of milk, some variables such as - the availability of cows, their health, feeding cost, availability of grazing land, cost of viable milk substitutes, number of dairy farmers, inflation, customer preferences, transportation cost etc. have an impact on milk prices.
So, an economist may apply ceteris paribus to explain the price of milk by taking the number of milkable cows into consideration and the theorizing would look something like - “if all other things remain constant (ceteris paribus), a decrease in the quantity of milk-producing cows creates a shortage in supply which causes an increase in the price of milk”.
Use of the Term in a Sentence
- Ceteris paribus is often used whenever making arguments about cause and effect in the field of economics and finance.
- Almost all major microeconomic and macroeconomic models rely on the use of ceteris paribus.
- Some critics of mainstream Economics argue that ceteris paribus offers economists an excuse to avoid dealing with actual human-nature issues.