1.1.1 Economics as a social science (ceteris paribus)

Question 1

What is Ceteris Paribus?

Answer 1

• The “ceteris paribus” assumption means “holding other things constant” or “all other things being equal.”
• It is used to isolate the effect of a specific variable while keeping other relevant factors constant.
• This assumption allows economists to analyse the relationship between variables without the complications of other influencing factors.

Question 2

What are some examples of Ceteris Paribus assumptions?

Answer 2

• Law of Demand: States that, all other things being equal, when the price of a good or service decreases, the quantity demanded increases, and conversely, when the price increases, the quantity demanded decreases.
  Ceteris paribus helps isolate the impact of price changes on quantity demanded, if factors like income, preferences, and the prices of related goods (substitutes and complements) remain constant
• Supply and Price: When analysing the supply of a product, ceteris paribus is used to understand the relationship between market price and quantity supplied.
  It assumes that other factors affecting supply, such as production costs, technology, and government regulations, taxes and subsidies are held constant.
  This allows economists to examine how changes in price directly impact the quantity producers are willing to supply.
• Marginal Utility: Marginal utility represents the additional satisfaction or benefit a consumer gains from consuming one more unit of a good.
  It’s assumed that the consumer’s preferences, income, and the prices of other goods remain constant while analysing the impact of consuming an additional unit of a specific good on their overall utility.

Question 3

When do you not use the Ceteris Paribus Assumption?

Answer 3

• When considering multiple variables: In some cases, it’s essential to analyse how multiple variables interact simultaneously. For example, when studying economic growth, we may want to examine how changes in both investment levels and government spending impact the economy.
• Behavioural economics: Behavioural economics studies the impact of psychological, social, and emotional factors on economic decisions. Often, we drop the ceteris paribus assumption to capture the nuances of human behaviour.

Question 4

How valid is the Ceteris Paribus assumption?

Answer 4

• Simplification: The ceteris paribus assumption is valuable for simplifying complex economic relationships, making them easier to analyse and understand. It allows economists to focus on specific cause-and-effect relationships.
• It’s often challenging to hold all other factors constant. Many economic variables are interconnected, and changes in one variable may lead to changes in others.