There is a phrase in Latin, one of the roots of Spanish, which is used in economics to refer to the phenomenon that occurs when two or more variables involved in an event remain constant and another (the one under study) changes.
That phrase is ceteris paribus, which translates as “other things being equal”, or “everything else constant.”
In economics, ceteris paribus would be the way to approach the study of a certain variable and its relationship with the others, to understand market behavior; it is mainly used to study commercial activities and to understand the behavior of supply and demand.
The phrase was popularized in the 19th century by Alfred Marshall, an English economist who created the neoclassical synthesis, which became the basis of modern economic theory, where it addressed concepts such as value, labor, capital and production.
Some aspects to consider
This maxim of economics adapted mainly for the analysis of phenomena that do not occur in isolation or unexpectedly, but are the product of a process that is gradually formed, has some aspects that need to be considered, such as:
- Understand complex facts of the economy through the simple analysis of phenomena that occur in the market; such as, for example, the reduction of the prices of a product, despite the fact that production costs are maintained.
- With this method of analysis, according to Marshall, variables can be studied in depth individually in any economic model (macro or microeconomic) and from any economic system (capitalist, socialist, planned or mixed).
- Some experts consider that with ceteris paribus only static analyzes can be carried out, since it prevents the incorporation of facts that tend to affect the phenomenon under study, such as some social variable, which we will talk about later.
- Marshall’s method works to raise assumptions and hypotheses that could be used to project a situation that sheds light on a phenomenon; in other words, it can be used to generate a vision of what could happen from a modeling of reality based on the hypotheses raised.
- With ceteris paribus it is possible to better understand the operation of the law of supply and demand, and its influence on the economic flow of a society.
Examples to illustrate the usefulness of ceteris paribus
In the economic aspect, there are many examples where the phrase ceteris paribus is applied with precision:
To know the behavior that a product will have as a new portfolio model in the market, a variable that considers the ceteris paribus is the price. This variable will be the one that changes, according to the market study, while the others will remain the same; which would be, market size, consumption habits, competition, product distribution, among others.
Continuing with the same example, other factors that would intervene in the demand for portfolios can be studied, such as, for example, the price of competing portfolios, product promotions, discounts, the current trend and the expectations they generate the wallets once on the market.
For these studies, the experts use graphs that model the possible scenarios according to the mentioned variables introduced in the model, in order to have more information and data to take the necessary measures that seek to meet the established goal: the highest sale of portfolios.
However, in the study of any economic model with the ceteris paribus method, it is possible that social variables are involved, such as unemployment rate, poverty index, purchasing power, customs, number of women, number of men, level of life, among others, which will intervene in the precision of the result and, consequently, the prediction of the model will be lower.