But what if a micro-burst kept it hovering in the air? That powerful gust of wind is an example of all other things not being equal. The law of gravity is still valid nonetheless, even though the bathroom scale didn’t fall to the ground this time. Here’s a real-world example. Thanks to the Great Recession, demand for oil dropped declining from 87.8 million barrels per day in the fourth quarter of 2007 to 84.2 million barrels per day in the second quarter of 2009. The law of demand says that oil prices should drop to meet demand. Instead, prices increased from $88.96 a barrel in the fourth quarter of 2007 to a high of $122.24 a barrel in the second quarter of 2008. Oil prices plunged drastically in the fourth quarter of 2008, but they began to increase once again in the second quarter of 2009. Ceteris paribus would indicate that you should look for other factors in this situation that were unequal. You would have found that commodities traders were afraid to enter the stock market, so they were trying to gain profit by bidding up the price of oil instead. There was an influx of money into commodities markets. The greater demand for oil futures is a large factor in what makes oil prices so high.
How Ceteris Paribus Works
The concept of ceteris paribus is used extensively in economics because so many variables are constantly changing. The law of gravity is easy to understand because it’s rare for something else to intervene, but that’s not the case with economics. Everything is always changing. This makes it harder to create economic laws than it is to form physical laws. Ceteris paribus makes economics simple. It allows you to imagine a situation where only two variables change. An economist might use ceteris paribus to explain the law of demand by focusing on the independent variable, demand, and the dependent variable, which would be price. The law of demand states, “If demand drops—ceteris paribus—then prices will fall to meet demand.” It lets you know that the only two variables under discussion here are price and demand. Prices will drop if demand drops, too, if all other things are equal. Sellers will lower their prices when people want less of a good or service. Or they might cut back on manufacturing to lower supply and keep prices the same. They might update the product to stimulate demand. That’s what Apple does to maintain high prices. Sometimes manufacturers can’t lower the price because their costs are too high. They’ll accept a lower volume in this case. The economic law of demand is like the physical law of gravity. When you throw the bathroom scale out the window, you don’t assume the law of gravity was suspended if it comes right back at you. You look for what else changed. Similarly, the law of demand is still operable if demand drops and prices go up, but you know to look for the other things that are no longer equal.
