A:

In economics, the assumption of ceteris paribus, a Latin phrase meaning "with other things the same" or "other things being equal or held constant," is important in determining causation. It helps isolate multiple independent variables affecting a dependent variable. Causal relationships among economic variables are difficult to isolate in the real world, since most economic variables are usually affected by more than one cause, but models often depend on an assumption of independent variables.

In the real world, for instance, it would be nearly impossible to determine the causal relationship between the price of a good (dependent variable) and the number of units demanded of it (independent variable), while also taking into account other variables that affect price. For example, the price of beef may rise if more people are willing to purchase it, and producers may sell it for a lower price if fewer people want it. But prices of beef may also drop if, for instance, the price of land to raise cattle also drops, making it difficult to assume it was demand alone that caused the price change.

However, if these other variables, such as prices of related goods, production costs and labor costs are held constant under the ceteris paribus assumption, it is simpler to describe the relationship between only price and demand.

Ceteris paribus is also used in other fields such as psychology and biology. These fields have ceteris paribus laws that are assumed to be true only under normal conditions. (For related reading, see: What is the difference between ceteris paribus and mutatis mutandis?)

RELATED FAQS
  1. How should I interpret a negative correlation?

    Learn more about correlation and how businesses analyze variables. Find out how negative correlations are interpreted by ... Read Answer >>
  2. How is the ability to perform Activities of Daily Living (ADL) measured?

    Find out how to apply sensitivity analysis to your investment decisions, why sensitivity analysis might be useful and what ... Read Answer >>
Related Articles
  1. Tech

    How Does Paribus Work and Make Money?

    Paribus gets costumers money back on their purchases after the fact, using the same algorithms that retailers use to manipulate online buyers.
  2. Investing

    What's a Sensitivity Analysis?

    Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable).
  3. Investing

    Regression Basics For Business Analysis

    This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how.
  4. Financial Advisor

    Life Insurance: Variable Vs. Variable Universal

    Do you know why you might need one policy versus the other? Read on to find out the difference between Variable and Variable Universal life insurance.
  5. Retirement

    How a Variable Annuity Works After Retirement

    These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
  6. Investing

    Consider These Facts Before Choosing a Variable Annuity

    Variable annuities do have some benefits, but there are some disadvantages and misconceptions to take into account as well.
  7. Insights

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  8. Retirement

    Variable Annuities: A Good Retirement Investment?

    Variable annuities provide lifetime payments and tax-deferred growth, but – given their hefty fees – are they right for you?
  9. Retirement

    Should Your 401(k) Be In An Annuity?

    Housing your retirement plan inside a variable annuity contract offers some big advantages, but only if you are close to retirement.
RELATED TERMS
  1. Ceteris Paribus

    Ceteris paribus is a Latin phrase usually rendered as "all other ...
  2. Variable Cost Ratio

    The variable cost ratio compares costs, which fluctuate depending ...
  3. Negative Correlation

    A perfect negative correlation is a relationship between two ...
  4. Variable Death Benefit

    Variable death benefit refers to the amount paid out at death ...
  5. Positive Correlation

    Positive correlation is a relationship between two variables ...
  6. Quadrix

    A stock valuation system that uses over 100 variables in seven ...
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center