Ceteris Paribus: Meaning explained in easy words

Ceteris Paribus: Explanation

Ceteris paribus is a Latin phrase that means 'other things, being equal. It is for these reasons that every economic law has to be stated with some conditions or qualifications. Even when these words are not stated explicitly, they are supposed to be there. This condition's statement means that once the said causes start working, they are not disturbed by any outside force till the outcome.

Interpretation:

You should note that even in other sciences also, this condition is always there in an explicit form. In other sciences, the ceteris paribus frequently holds or can be made operative under laboratory conditions. But in economics, this condition is not satisfied. You cannot conduct economic experiments under controlled conditions. Since economic laws are the statements of economic activities in response to various forces, the economists use certain guiding principles under which the answer is supposed to come into existence. One such guiding principle is that every economic unit decides about its response to various causes on the criterion of rationality. It means that the reaction is determined so that it is expected to serve the interest of the responding units in the best possible manner. For example, a consumer is supposed to get the maximum potential utility from his purchases for a given amount of expenditure.

A monopolist is expected to choose that quantity of output and fix that price for his product, bringing him maximum profit. While formulating economic laws, the next guiding principle is as follows. It is assumed that every monetary unit, guided by rationality, tries to achieve optimality, which is the best attainable position. Optimization means that a criterion or objective is located, and an effort is made to achieve it or come as close to it as possible. Two examples of such criteria are maximizing the profit and minimizing the cost of production. In actual practice, a criterion may riot be achieved on account of some handicaps.

 

Illustration of Ceteris Paribus in Economics :

An increment in financing costs will 'ceteris paribus' motivation the interest for credits to fall. (Higher financing costs increment the expense of getting, so there will be less interest for credits. Notwithstanding, if certainty was high, individuals may, in any case, need to get more. Ceteris paribus accepts things like certainty continue as before.)

Ceteris paribus – higher oil costs should prompt less interest for oil.

Ceteris paribus – higher financing costs should prompt lower financial development.

Ceteris paribus – more exorbitant costs of espresso ought to urge cultivators to attempt to build espresso's inventory.