b) Ceteris paribus

b) The use of the ceteris paribus assumption in building models

Economists create models based on the principle of ceteris paribus to account for changing variables, which allows them to simplify and explain the causes and effects of a specific factor and dismiss other variables

• Ceteris paribus = “all other variables remain constant”

Example:

• Many factors affect the unemployment rate; interest rates, consumer confidence, government policies

• Analysis conducted through ceteris paribus allows economic models to explain the effect of just one factor (interest rates) and assume all other variables are constant (when they typically are not)