Thursday, May 29, 2008

ceteris paribus

"Ceteris paribus" is a Latin phrase that is generally translated as "all other things being equal" or "with all other factors or things remaining the same." This is a common (frequently unstated) assumption of economic analysis used to isolate the effect of a particular event or phenomenon.

If an economist asks "What is the likely effect on the oil market of the discovery of new oil reserves in the Gulf of Mexico?" the ceteris paribus assumption ignores other events occurring at the same time that may also affect the market. For example, the emergence of a larger middle class in China is increasing car ownership and the demand for fuel. The market for oil may be affected by many forces of supply and demand at the same time. The ceteris paribus assumption allows analysts to isolate individual market forces from what are otherwise extremely complex interactions. To do a complete analysis of a market, however, one should consider all factors.

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