How do you correctly apply ceteris paribus? (1 Viewer)

[sadpwner]

What do assume remains constant and what doesn't? General tips?

For example, if the price of Australian commodities were to rise, what would happen to the Australian dollar? It appreciates. You assume that quantity of demand remains constant.

If another question were to ask, if a company raises its commodity prices by $1000 would they be more profitable? Would the answer be yes?

Also, if the RBA were to lower the cash rate would demand for AUS$ fall or rise? The cashrate falls so interest falls and foreign investors would demand less. Here you don't assume inflation isn't affected which would affect commodity prices and then demand for AUS$, but you assume interest rate falls instead?

 

[jackdaynight]

Ceteris paribus means 'all other things being equal', so to apply the principle you assume that there is nothing impacting on the hypothetical situation except the variable you are changing. However if changing the variable you are focussing on will have an effect on something else, you have to factor that in as well.

So if the price of Australian commodities rises, they will become harder to sell and demand will fall. Less overseas customers will need to convert their currency into A$, and so supply of the A$ will rise, leading to a depreciation. Or it could have the opposite effect if the commodity is something that other economies can't do without, so you really just have to stick to what you initially say will happen and explain it properly

 

[mreditor16]

Ceteris paribus means 'all other things being equal', so to apply the principle you assume that there is nothing impacting on the hypothetical situation except the variable you are changing. However if changing the variable you are focussing on will have an effect on something else, you have to factor that in as well.

So if the price of Australian commodities rises, they will become harder to sell and demand will fall. Less overseas customers will need to convert their currency into A$, and so supply of the A$ will rise, leading to a depreciation. Or it could have the opposite effect if the commodity is something that other economies can't do without, so you really just have to stick to what you initially say will happen and explain it properly

Overall, a very solid answer.

However, with your bolded part, I think its better to say that "less overseas customers will need to convert their currency into $A" --> "Demand for the $A will decrease" ---> "the $A depreciates".

I think its just more conventional (in this particular situation) to say demand increases, instead of supply decreasing.