Ceteris Paribus

Two Little Words That Simplify Economics

BY KIMBERLY AMADEO Updated July 03, 2019

Ceteris paribus is a Latin phrase that means "all other things being equal." Experts use it to explain the
theory behind laws of economics and nature. It means that most of the time, something will occur as a
result of something else. That is, of course, if nothing else changes.

For example, the law of gravity states that a bathroom scale thrown out the window will fall to the
ground, ceteris paribus. That means gravity will send the bathroom scale plummeting to the ground as
long as nothing else changes.

What if a micro-burst kept it hovering in the air? That powerful gust of wind is an example of all other
things not being equal. The law of gravity is still valid even though, this time, the bathroom scale didn't
fall to the ground.

Use in Economics

The concept and phrase of ceteris paribus are used extensively in economics. That's because there are
so many variables constantly changing. The law of gravity is easy to understand because it's rare for
something else to intervene. The bathroom scale will almost always fall to the ground.

That's not the case in economics. Everything is always changing. That makes it harder to create
economic laws than physical laws. That's where ceteris paribus makes economics simple. It allows you to
imagine a situation where only two variables change. You can focus on how a change in the independent
variable affects the dependent variable.

Here's how an economist might use ceteris paribus to explain the law of demand. You'll need to focus
on the independent variable, demand, and the dependent variable, price.

The law of demand states, "If demand drops - ceteris paribus - then prices will fall to meet demand." It
lets you know that the only two variables under discussion are price and demand. If demand drops, all
other things being equal, prices will too.

In other words, when people want less of a good or service, then sellers will lower the prices. They could
cut back on manufacturing to lower supply and keep prices the same. Or they could update the product
to stimulate demand. That's what Apple does to maintain high prices. Sometimes manufacturers can't
lower the price because their costs are too high. In that case, they'll accept a lower volume.

In the real world, all other things are never equal. But using the concept of ceteris paribus allows you to
understand the theoretical relationship between cause and effect.

The economic law of demand is like the physical law of gravity. When you throw the bathroom scale out
the window, and it comes right back at you, you don't assume the law of gravity was suspended. You
look for what else has changed. Similarly, if demand drops and prices go up, the law of demand is still
operable. But you now know to look for the other things that are no longer equal.
Example

Here's a real-world example. Thanks to the Great Recession, demand for oil dropped. It declined from
86.66 million barrels per day in the fourth quarter 2007 to 85.73 million barrels per day in the first
quarter of 2008. The law of demand says that oil prices should drop to meet demand. Instead, prices
increased from $87.79 a barrel to $110.21 a barrel during that same period.

Thanks to your understanding of ceteris paribus, you would now look to find out what other things were
unequal. You would have found that commodities traders, afraid to enter the stock market, were now
trying to gain profit by bidding up the price of oil. There was an influx of money into commodities
markets. The greater demand for oil futures is a large factor in what makes oil prices so high.

Pronunciation

Ceteris paribus pronounced like "se-ter-es pa-re-bes." If that doesn't help, just think of it like you're
saying this sentence fast: "Setter is pear a bus."

What Makes Oil Prices So High?

A cow grazes on grass at the Stemple Creek Ranch on April 24, 2014 in Tomales, California. Extreme
weather conditions across the country have reduced the number of cattle coming to market and have
sent the wholesale price of U.S. beef to record highs.

5 Determinants of Demand with Examples and Formula

price shopping

The law of demand states that all other things being equal, the quantity bought of a good or service is a
function of price. As long as nothing else changes, people will buy less of something when its price rises.
They'll buy more when its price falls.

The demand schedule tells you the exact quantity that will be purchased at any given price. A real-life
example of how this works in the demand schedule for beef in 2014.

The demand curve plots those numbers on a chart. The quantity is on the horizontal or x-axis, and the
price is on the vertical or y-axis.

If the amount bought changes a lot when the price does, then it's called elastic demand. An example of
this is ice cream. You can easily get a different dessert if the price rises too high.

If the quantity doesn't change much when the price does, that's called inelastic demand. An example of
this is gasoline. You need to buy enough to get to work regardless of the price.

This relationship holds true as long as "all other things remain equal." That part is so important that
economists use a Latin term to describe it: ceteris paribus. The "all other things" that need to be equal
under ceteris paribus are the other determinants of demand. These are prices of related goods or
services, income, tastes or preferences, and expectations. For aggregate demand, the number of buyers
in the market is also a determinant.
If the other determinants change, then consumers will buy more or less of the product even though the
price remains the same. That's called a shift in the demand curve.

Law of Demand Explained

For example, airlines want to lower costs when oil prices rise to remain profitable. They also don't want
to cut flights. Instead, they buy more fuel-efficient planes, fill all seats, and change operations to
improve efficiency. As a result, they've raised seat-miles per gallon from 55 in 2005 to 60 in 2011. The
law of demand would describe this as the quantity of fuel required by the airlines dropped as the price
rose.

Of course, all other things were not equal during this period. In fact, demand for jet fuel was further
lessened because airlines' income also dropped at the same time. The 2008 global financial crisis meant
that travelers cut back on their demand for air travel. The airlines' expectations about the price of jet
fuel also changed. They realized it would probably continue to rise over the long term. The other two
determinants of airline's demand for jet fuel stayed the same. They couldn't switch to another fuel, and
their tastes or desire to use jet fuel didn't change.

Retailers use the law of demand every time they offer a sale. In the short-term, all other things are
equal. Sales are very successful in driving demand. Shoppers respond immediately to the advertised
price drop. It works especially well during massive holiday sales, such as Black Friday and Cyber Monday.

The Law of Demand and the Business Cycle

Politicians and central bankers understand the law of demand very well. The Federal Reserve's mandate
is to prevent inflation while reducing unemployment. During the expansion phase of the business cycle,
the Fed tries to reduce demand for all goods and services by raising the price of everything. It does this
with contractionary monetary policy. It raised the fed funds rate, which increases interest rates on loans
and mortgages. That has the same effect as raising prices, first on loans, then on everything bought with
loans, and finally everything else.

Of course, when prices go up, so does inflation. That's not always a bad thing. The Fed has a 2 percent
inflation target for the core inflation rate. The nation's central bank wants that level of mild inflation. It
sets an expectation that prices will increase 2 percent a year. Demand increases because people know
that things will only cost more next year. They may as well buy it now ceteris paribus.
During a recession or the contraction phase of the business cycle, policymakers have a worse problem.
They've got to stimulate demand when workers are losing jobs and homes and have less income and
wealth. Expansionary monetary policy lowers interest rates, thereby reducing the price of everything. If
the recession is bad enough, it doesn't reduce the price enough to offset the lower income.

In that case, fiscal policy is needed. The federal government starts spending to create public works jobs.
It extends unemployment benefits and cuts taxes. As a result, the deficit increases because the
government's tax revenue falls. Once confidence and demand are restored, the deficit should shrink as
tax receipts increase.

What Really Makes the World Go Round

shoppers

When Demand Changes But Price Remains the Price

price shopping

How a Demand Curve Reflects Consumer Desires

A cow grazes on grass at the Stemple Creek Ranch on April 24, 2014 in Tomales, California. Extreme
weather conditions across the country have reduced the number of cattle coming to market and have
sent the wholesale price of U.S. beef to record highs.

Real Life Demand Schedule Showing Beef Prices and Demand in 2014