Economics 9708/13 — May/June 2017

Background Concept

Ceteris paribus is a Latin phrase meaning 'all other things being equal' or 'holding other things constant'. It is a fundamental assumption in economics that allows economists to analyse the relationship between two variables without the complication of other factors changing at the same time. For example, when we say 'a fall in the price of a good leads to an increase in the quantity demanded', we assume that income, tastes, and the prices of other goods do not change. Without ceteris paribus, it would be impossible to isolate cause and effect in economic models.

Understanding the Question

This is a multiple-choice question asking for an example of the use of ceteris paribus. The question does not ask for a definition but for a scenario that correctly demonstrates the assumption in action. The key is to identify which option describes a situation where one variable changes while all other relevant variables are held constant.

Approach

Read each option carefully. For each, ask: does this describe a situation where only one thing changes and everything else stays the same? Or does it describe a general trend or a relationship where other factors might also be changing? The correct answer will explicitly or implicitly hold all other factors constant.

Step-by-Step Reasoning

• Option A: 'The rate of increase in wage rates equals the rate of increase in price levels.' This describes a relationship between two variables (wage rates and price levels) but does not say that other factors are held constant. It simply states that the two rates are equal. This is not an example of ceteris paribus.

• Option B: 'There is a constant rise in both wage rates and price levels.' Again, this describes a trend where both variables are rising together. It does not isolate the effect of one on the other, nor does it hold other factors constant. This is not an example of ceteris paribus.

• Option C: 'Wage rates and the price level remain constant at their original levels.' This describes a situation of no change at all. Ceteris paribus is about holding other things constant while one thing changes. Here, nothing changes, so it does not illustrate the use of the assumption.

• Option D: 'Wage rates rise when the only change is a rise in prices.' This is the correct application. It says that the only change occurring is a rise in prices, and as a result, wage rates rise. All other factors are implicitly held constant ('the only change'). This is exactly how ceteris paribus is used: to isolate the effect of a change in one variable (prices) on another (wage rates).

Key Takeaways

• Ceteris paribus is a simplifying assumption that allows economists to analyse cause and effect.
• It is not about describing a general trend or a relationship without controls.
• The key phrase to look for is 'all other things being equal' or 'the only change'.

Common Mistakes

• Choosing Option A or B because they describe a relationship between two variables. However, they do not hold other factors constant; they simply state a correlation.
• Choosing Option C because it mentions 'constant', but ceteris paribus requires one variable to change while others are held constant, not for all to remain unchanged.

Things to Be Careful About

• The question asks for an 'example of the use of ceteris paribus', not a definition. Make sure the scenario you choose actually demonstrates the assumption in action.
• Look for language that implies 'only' or 'all else equal'.