Ceteris paribus and mutatis mutandis are Latin phrases commonly used as shorthand to explain certain ideas often found in the world of economics and finance. When analyzing economic data, the former means that we isolate a variable of interest and hold everything else constant. The latter implies that we allow all factors to vary in relation to one another.
- The assumption of ceteris paribus, a Latin phrase meaning "other things equal or held constant," helps isolate the effect of one variable on another.
- Mutatis mutandis, on the other hand, considering how all factors interact with one another as a variable of interest affects an outcome of interest.
- Ceteris paribus assumptions help to isolate causation, while mutatis mutandis lends itself more to understanding multiple correlation.
Ceteris paribus can be translated into "all other things being equal" or "holding other factors constant." For economic analysis, ceteris paribus means that when considering the effect of one economic variable on another, all other factors that may affect the second variable are held constant. The purpose is to allow the economist to understand one or two variables in isolation and is brought into play due to the extreme difficulty of analyzing several dynamic economic factors at once.
For example, according to the law of demand and law of supply, if the price of beef increases, ceteris paribus, the demand for beef is expected to decrease. However, without the distinction of the ceteris paribus principle, this assumption is incorrect as the demand for beef may remain constant as the price of all substitute goods, such as chicken, may have also increased equally.
Mutatis mutandis approximately translates as "allowing other things to change accordingly" or "the necessary changes having been made." In other words, in considering the effect of one economic variable over another, other affected variables also change as a result. This economic principle contrasts with ceteris paribus. Mutatis mutandis is a more complex concept than ceteris paribus as it involves analysis of several dynamic variables and their effects on each other together rather than in isolation. For example, while examining the current price of an item bought five years ago, the concept of mutatis mutandis indicates that all necessary changes such as inflation rate have been considered.
The principle of mutatis mutandis is, however, more commonly used in law than in the fields of economics or finance. It is generally used when comparing two or more cases or situations that require some necessary alterations that do not affect the main subject matter of the issue, especially contracts between parties that have made similar agreements before. For example, a tenancy renewal contract between a landlord and the tenant may be drawn up mutatis mutandis, which means it reflects necessary changes such as a hike in rent. The concept is generally used in legal documents to draw attention to variations between a current statement and a previous version of the same.
The Bottom Line
Ultimately, the difference between the contrasting principles of ceteris paribus and mutatis mutandis is a matter of correlation versus causation. The ceteris paribus principle enables the study of the causal effect of one variable on another, with all other influencing factors held constant. It is, thus, a partial derivative. Mutatis mutandis allows for an analysis of the correlation effect by analyzing the effect of one variable over another with other variables changing as they will. The corresponding recognition of the dynamic nature of economic factors helps draw a larger picture showing how economic variables influence and correlate to each other; as such, mutatis mutandis is considered a total derivative.