Definition of ceteris paribus
Ceteris paribus is a Latin phrase meaning ‘all other things remaining equal’
The concept of ceteris paribus is important in economics because in the real world it is usually hard to isolate all the different variables.
Example of Ceteris Paribus in Economics
- An increase in interest rates will ‘ceteris paribus’ cause demand for loans to fall. (Higher interest rates increase the cost of borrowing so there will be less demand for loans. However, if confidence was high, people might still want to borrow more. Ceteris paribus assumes things like confidence remain the same.)
- Ceteris paribus – higher oil prices should lead to less demand for oil.
- Ceteris paribus – higher interest rates should lead to lower economic growth.
- Ceteris paribus – higher prices of coffee should encourage firms to increase supply
Importance of ceteris paribus
In the real world, it is very hard to isolate only one factor. For example, if we look at exchange rates, we would expect higher interest rates (ceteris paribus) to cause an appreciation in the currency. But, in the real world, there will be many other factors affecting exchange rates. However, by isolating the other factors we can consider how higher interest rates are likely to have an effect.