Sources of Students’ Misconceptions in Economics, pp. 8 of 15

Example One: “Why must we always add ceteris paribus to our sentences?”

A student asks her teacher in exasperation why the assumption “ceteris paribus” (meaning “all things remaining the same”) must be written in their essay answers. This student does not seem to know that economists use models to explain how the economy works and to predict future economic outcomes. In economic models, simplifying assumptions are made to focus on selected variables of the phenomenon being studied. The ceteris paribus assumption is used for partial equilibrium analysis: the analysis of the equilibrium position of a sector or a group in an economy. This analysis studies only a few selected variables at a time.  In other words, this method considers the changes in one or two variables keeping all others constant, i.e., ceteris paribus (others remaining the same). This assumption is always stated as a caveat since the analysis is only partial, involving some, not all, of the factors.

Example Two: “When the price of Coke rises, the demand for Pepsi will increase. This in turn will cause a rise in the price of Pepsi and a subsequent fall in the quantity demanded of Pepsi and rise in the quantity demanded of Coke.”

A student confuses a change in quantity that consumers demand in response to a price change with their response to the change in the price of a substitute. In analyzing the market for one good (Coke), economists also consider the impact of changes in the market for Coke on the markets for related goods which may be substitutes or complements. Using comparative statistics, the increase in the price of Coke will lead to an increase in demand for Pepsi with the price of Pepsi unchanged. Students tend to move on to another round of changes, ignoring the assumptions of comparative statistics, to declare that the increase in demand for Pepsi raises its price, and then predict a subsequent fall in the quantity demanded of Pepsi, leading to the conclusion that the initial increase in the price of Coke triggers a rise in quantity demanded for Coke! The student has confused an increase in demand for Pepsi arising from the price change of a substitute (Coke) with a fall in quantity demanded of Pepsi arising from a price increase in Pepsi.

An Inspiring Quote

"[Open-mindedness] includes an active desire to listen to more sides than one; to give heed to facts from whatever source they come; to give full attention to alternative possibilities; to recognize the possibility of error even in the beliefs that are dearest to us."

~ John Dewey, How We Think

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