What is 'Ceteris Paribus'
Ceteris paribus, a Latin phrase, roughly means “holding other things constant.” The more common English translation reads “all other things being equal.” This term is most widely used in economics and finance as a shorthand indication of the effect of one economic variable on another, keeping all other variables constant that could render an effect on the second variable.
For an example, consider the laws of supply and demand. It could be said that if demand for any given product is outweighed by the product’s supply, ceteris paribus, prices will likely rise. The use of the Latin phrase in this example simply indicates if all additional factors that could affect the outcome, such as the presence of a substitution, remain the same, prices will generally increase.
BREAKING DOWN 'Ceteris Paribus'
This phrase is of particular importance in the significant study of the cause and effect relationship between two specified variables, so much so that additional relevant factors that hold influence over said variables are assumed to be constant through the assumption of ceteris paribus. Ceteris paribus is, in many instances, a fundament assumption to the predictive purpose of scrutiny.
Ceteris Paribus v. Mutatis Mutandis
While somewhat similar in assumption aspects, ceteris paribus is not to be confused with mutatis mutandis, translated as “once necessary changes have been made.” It is used in European and English languages to acknowledge that a comparison, like the comparison of two variables, requires certain necessary alterations that are left unsaid because of their obviousness. Comparatively, ceteris paribus excludes any and all changes except for those that are explicitly spelled out. More specifically, the phrase mutatis mutandis is largely encountered when talking about counterfactuals, used as a shorthand to indicate initial and derived changes that have been previously discussed or are assumed to be obvious.
The ultimate difference between these two contrasting principles is a matter of correlation versus causation. The principle of ceteris paribus facilitates the study of the causal effect of one variable on another. Conversely, the principle of mutatis mutandis facilitates an analysis of the correlation between the effect of one variable on another while other variables change at will.
The Fallacy of Ceteris Paribus
Ultimately, the factors that affect the economy or finance are continuously changing. While independent studies or tests may allow for the use of the ceteris paribus principle, the reality of, for example, the stock market, is that change is inevitable and the various factors that would affect the price of a stock cannot all, except for one, be held constant.