The use of the phrase other things constant in supply and demand analysis indicates that:
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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.
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.
Ceteris paribus, literally “holding other things constant,” is a Latin phrase that is commonly translated into English as “all else being equal.”
A dominant assumption in mainstream economic thinking, it acts as a shorthand indication of the effect of one economic variable on another, provided all other variables remain the same (constant). In the scientific sense, if we claim that one variable influences another, ceteris paribus, we are essentially controlling for the effects of some other variables.
- Ceteris paribus is a Latin phrase that generally means “all other things being equal.”
- In economics, it acts as a shorthand indication of the effect one economic variable has on another, provided all other variables remain the same.
- Many economists rely on ceteris paribus to describe relative tendencies in markets and to build and test economic models.
- The difficulty with ceteris paribus is the challenge of holding all other variables constant in an effort to isolate what is driving change.
- In reality, one can never assume “all other things being equal.”
In the fields of economics and finance, ceteris paribus is often used when making arguments about cause and effect. An economist might say raising the minimum wage increases unemployment, increasing the supply of money causes inflation, reducing marginal costs boosts economic profits for a company, or establishing rent control laws in a city causes the supply of available housing to decrease. Of course, these outcomes can be influenced by a variety of factors, but using ceteris paribus allows all other factors to remain constant, focusing on the impact of only one.
Ceteris paribus assumptions help transform an otherwise deductive social science into a methodologically positive “hard” science. It creates an imaginary system of rules and conditions from which economists can pursue a specific end. Put another way; it helps the economist circumvent human nature and the problems of limited knowledge.
Most, though not all, economists rely on ceteris paribus to build and test economic models. In simple language, it means the economist can hold all variables in the model constant and tinker with them one at a time. Ceteris paribus has its limitations, especially when such arguments are layered on top of one another. Nevertheless, it is an important and useful way to describe relative tendencies in markets.
Suppose that you wanted to explain the price of milk. With a little thought, it becomes apparent that milk costs are influenced by numerous things: the availability of cows, their health, the costs of feeding cows, the amount of useful land, the costs of possible milk substitutes, the number of milk suppliers, the level of inflation in the economy, consumer preferences, transportation, and many other variables. So an economist instead applies ceteris paribus, which essentially says if all other factors remain constant, a reduction in the supply of milk-producing cows, for example, causes the price of milk to rise.
As another example, take the laws of supply and demand. Economists say the law of demand demonstrates that ceteris paribus, more goods tend to be purchased at lower prices. Or that, if demand for any given product exceeds the product’s supply, ceteris paribus, prices will likely rise.
In general, economists and other social scientists will report how variables influence one another while holding all else constant. So, if we say that low unemployment is associated with higher inflation, ceteris paribus, it means holding everything else constant like GDP growth, balance of trade, money supply, and so on. However, each of these other factors, among others, also can play into inflation.
We can also say the same thing about the minimum wage: ceteris paribus, raising the minimum wage is thought to lower employment as businesses cut costs. But this also ignores many other social and political factors. For example, employees may work harder and be more productive with higher wages. Or, better-paid workers may spend more and increase aggregate demand.
Since economic variables can only be isolated in theory and not in practice, ceteris paribus can only ever highlight tendencies, not absolutes.
Two major publications helped move mainstream economics from a deductive social science based on logical observations and deductions into an empirically positivist natural science. The first was Léon Walras’ Elements of Pure Economics, published in 1874, which introduced general equilibrium theory. The second was John Maynard Keynes’ The General Theory of Employment, Interest, and Money, first published in 1936, which created modern macroeconomics.
In an attempt to be more like the academically respected “hard sciences” of physics and chemistry, economics became math-intensive. Variable uncertainty, however, was a major problem; economics could not isolate controlled and independent variables for math equations. There was also a problem with applying the scientific method, which isolates specific variables and tests their interrelatedness to prove or disprove a hypothesis.
Economics does not naturally lend itself to scientific hypothesis testing as does physics. In the field of epistemology, scientists can learn through logical thought experiments, also called deduction, or through empirical observation and testing, also called positivism. Geometry is a logically deductive science. Physics is an empirically positive science. Unfortunately, economics and the scientific method are naturally incompatible. No economist has the power to control all economic actors, hold all of their actions constant, and then run specific tests. No economist can even identify all of the critical variables in a given economy. For any given economic event, there could be dozens or hundreds of potential independent variables.
Enter ceteris paribus. Mainstream economists construct abstract models where they pretend all variables are held constant, except the one they want to test. This style of pretending, called ceteris paribus, is the crux of general equilibrium theory. As economist Milton Friedman wrote in 1953, “theory is to be judged by its predictive power for the class of phenomena which it is intended to ‘explain.'” By imagining all variables save one are held constant, economists can transform relative deductive market tendencies into absolute controllable mathematical progressions. Human nature is replaced with balanced equations.
Suppose an economist wants to prove a minimum wage causes unemployment or that easy money causes inflation. They could not possibly set up two identical test economies and introduce a minimum wage law or start printing dollar bills. So the positive economist, charged with testing their theories, must create a suitable framework for the scientific method, even if this means making very unrealistic assumptions. The economist assumes buyers and sellers are price-takers rather than price-makers.
The economist also assumes actors have perfect information about their choices since any indecision or incorrect decision based on incomplete information creates a loophole in the model. If the models produced in ceteris paribus economics appear to make accurate predictions in the real world, the model is considered successful. If the models do not appear to make accurate predictions, they are revised.
This can make positive economics tricky; circumstances might exist that make one model look correct one day but incorrect a year later. Some economists reject positivism and embrace deduction as the principal mechanism of discovery. The majority, however, accept the limits of ceteris paribus assumptions, to make the field of economics more like chemistry and less like philosophy.
Ceteris paribus assumptions are at the heart of nearly all mainstream microeconomic and macroeconomic models. Even so, some critics of mainstream economics point out that ceteris paribus gives economists the excuse to bypass real problems about human nature.
Economists admit these assumptions are highly unrealistic, and yet these models lead to concepts such as utility curves, cross elasticity, and monopoly. Antitrust legislation is actually predicated on perfect competition arguments. The Austrian school of economics believes ceteris paribus assumptions have been taken too far, transforming economics from a useful, logical social science into a series of math problems.
Let’s go back to the example of supply and demand, one of the favorite uses of ceteris paribus. Every introductory textbook on microeconomics shows static supply and demand charts where prices are given to both producers and consumers; that is, at a given price, consumers demand and producers supply a certain amount. This is a necessary step, at least in this framework, so that economics can assume away the difficulties in the price-discovery process. But prices are not a separate entity in the real world of producers and consumers. Rather, consumers and producers themselves determine prices based on how much they subjectively value the good in question versus the quantity of money for which it is traded.
Financial consultant Frank Shostak wrote that this supply-demand framework is “detached from the facts of reality.” Rather than solving equilibrium situations, he argued, students should learn how prices emerge in the first place. He claimed any subsequent conclusions or public policies derived from these abstract graphical representations are necessarily flawed. Like prices, many other factors that affect the economy or finance are continuously in flux. Independent studies or tests may allow for the use of the ceteris paribus principle. But in reality, with something like the stock market, one can never assume “all other things being equal.” There are too many factors affecting stock prices that can and do change constantly; you can’t isolate just one.
Ceteris paribus drives supply and demand curve expectations. The relationship between quantity and price can only be determined if the variables in question are influenced and the rest are held constant.
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 to acknowledge that a comparison, such as the comparison of two variables, requires certain necessary alterations that are left unsaid because of their obviousness.
In contrast, 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 boils down to 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.
Ceteris paribus in economics is a reference to how one isolated variable may change an economic environment assuming all other variables remain the same. In economics, ceteris paribus is often highly hypothetical as national economics and macroeconomic conditions are highly intricate and complex. However, ceteris paribus is the practice of seeing how a single economic concept (i.e. inflation) can impact broader concepts.
All things being equal, if the price of milk increases, people will buy less milk. This assumption ignores how other substitutes are behaving, how household income is behaving, or non-economic factors such as the health benefits of milk. Ceteris paribus, people will buy less of a product if the price is higher.
Ceteris paribus is considered natural law. It is not codified by any government; instead, it is thought to naturally occur based on how certain variables interact. For example, if the United States drilled for more oil domestically, there would be more supply for gasoline and the price of gas would drop. There is no law that defines that this would happen; it’s simply assumed as the outcome based on how situations naturally flow together.
Ceteris paribus helps determine what variables impact outcomes. By holding one variable constant or assuming that only one variable changes, it is inferred that any corresponding change is directly correlated to that single variable. Ceteris paribus may help drive metrics on customer taste, customer preference, consumer spending, the price of goods, market expectations, or government policy.
Ceteris paribus is a broad term that defines what variables are changing or what variables are remaining the same in a given situation. Often, to isolate only one variable, economists cite ceteris paribus to clarify that their assumptions on a given outcome are only valid if all other variables are remaining the same. Though ceteris paribus is truly unlikely due to the complexity of macroeconomic factors, it may still be useful in testing variables and determining what causes outcomes.