What is the importance of Ceteris Paribus in economic?

Question

What is the importance of Ceteris Paribus in economic?

Answer 1

This comes from Latin, and literally means 'other things held equal'.

For example, if the price of petrol rose, you would expect more people use public transport, ceteris paribus. However, everything else may not remain equal. e.g. Cost of cars might go down even though cost of petrol went up, etc.

Economists need to use this as a benchmark to understand how two different factors relate to each other. A lot of the time economists speak hypothetically about different subjects in economics. Hope this helps.

Answer 2

Everything in economics is dynamic - meaning if you change one aspect such as a macroeconomic variable like the rate of inflation or an understood constant such as the money multiplier, everything else in the analysis may change based on that.

Consider that financial decisions we make as consumers do not solely have one cause. Say you want to open a 36-month CD and you shop for the best rate at area banks. The bank you choose may seem straightforward - but your answer may change based on changes in information. What if the Fed announces that it expects inflation to skyrocket at the end of the year - you may want a shorter-term CD because interest rates may have to rise to accomodate the higher inflation. What if your income increases - would you put your CD in for a longer term, then, since you don't have as urgent of a need for those funds?

At the aggregate, it is difficult to predict the decisions of many consumers and producers when you change a wide swath of variables at once. So we change one at a time in order to examine its impact - all other things equal (ceteris paribus), boosting income causes consumers to save more, which means we expect to see more funds go into CDs. Ceteris Paribus, the more likely interest rates are to drop or stay the same, the longer term savers are likely to use for CDs.

Answer 3

"Ceteris Paribus" is "everything else is held constant".

In reality you are dealing with partial differential equations.  (This means that what you are trying to measure is a function of more than one variable.)   In a system where the dynamics are governed by PDEs, you can determine the sensitivity of one variable by changing it while holding everything else constant.  If you allowed two things to change at once, it would be much harder to tell how much influence each change has on its own.