The Ceteris Paribus Assumption

In this revision video we look at the ceteris paribus assumption and how challenging it can improve evaluation marks.

To simplify analysis, economists isolate a theoretical relationship between two variables by assuming ceteris paribus – i.e. all other influencing factors are held constant.

The ceteris paribus assumption is a Latin phrase that means "other things being equal." It is used in economics to refer to the assumption that all other factors are held constant in order to isolate the effect of a single variable on an economic outcome. The ceteris paribus assumption is a useful tool in economics because it allows economists to isolate the effect of a single variable and to better understand the underlying relationships at work. However, it is important to note that the ceteris paribus assumption is a simplification of reality and that in the real world, many factors are likely to be changing at the same time.

Here are four examples of the use of the ceteris paribus assumption:

1. Analyzing the effect of a change in taxes on consumer spending: An economist might hold all other factors constant, such as income, prices, and consumer confidence, in order to isolate the effect of the tax change on consumer spending.
2. Analyzing the effect of a change in the minimum wage on employment: An economist might hold all other factors constant, such as the overall level of economic activity and the productivity of workers, in order to isolate the effect of the minimum wage increase on employment.
3. Analyzing the effect of a change in interest rates on investment: An economist might hold all other factors constant, such as the level of economic uncertainty and the availability of credit, in order to isolate the effect of the interest rate change on investment.
4. Analyzing the effect of a change in the exchange rate on exports: An economist might hold all other factors constant, such as the competitiveness of domestic firms and the demand for exports, in order to isolate the effect of the exchange rate change on exports.