Examples and Definition of Ceteris Paribus
A bathroom scale tossed out the window will, ceteris paribus, fall to the ground according to the law of gravity. If nothing else changes, gravity will send the bathroom scale tumbling to the ground.
What if, though, a micro-burst kept it circling in midair? All other things are not equal, as evidenced by that strong wind gust. Even though the bathroom scale didn’t fall to the ground this time, the law of gravity still holds true.
Here is a concrete illustration. Oil demand decreased as a result of the Great Recession, falling from 87.8 million barrels per day in the fourth quarter of 2007 to 84.2 million barrels per day in the second quarter of 2009. According to the law of demand, oil prices should decrease to accommodate demand.
Instead, prices rose, reaching a peak of $122.24 per barrel in the second quarter of 2008 from a low of $88.96 in the fourth quarter of 2007. The fourth quarter of 2008 saw a sharp decline in oil prices, while the second quarter of 2009 saw a return to growth.
Ceteris paribus would suggest that you seek for additional factors that were uneven in this case. You would have discovered that traders in commodities were attempting to make money by driving up the price of oil because they were afraid to participate in the stock market. Money poured into the markets for commodities. One of the main reasons why oil prices are so high is the increased demand for oil futures.
Ceteris Paribus: Its Operation
Because there are so many factors that are continually changing, the idea of ceteris paribus is frequently employed in economics. Because it is uncommon for something else to intervene, the rule of gravity is simple to comprehend, but economics is more complicated. Everything is constantly evolving.
This makes forming economic laws more difficult than establishing physical laws. Economics is made easy by ceteris paribus. It enables you to picture a scenario in which only two factors alter.
By concentrating on the independent variable, demand, and the dependent variable, price, an economist may utilize ceteris paribus to explain the law of demand. According to the rule of demand, prices will decrease to satisfy demand if demand declines, ceteris paribus. It informs you that price and demand are the only two factors being discussed. If everything else remains the same, prices will decline if demand declines as well.
When consumers demand fewer units of a good or service, sellers will reduce their pricing. Alternately, companies can reduce production in order to reduce the supply and maintain the same prices. To boost demand, they might update the product. Apple does this to keep its prices high. Because their costs are too high, producers occasionally are unable to reduce the price. In this situation, a lower volume is acceptable.
Similar to the physical rule of gravity is the economic law of demand. You don’t assume the law of gravity was suspended when you threw the bathroom scale out the window if it came back at you. You search for other changes.
If prices increase and demand declines, the rule of demand is still in effect, but you will know to seek for other factors that are no longer equal.