Nope, That’s Not What Price Elasticity Means

I’m taking an Information Systems Management course. One of the textbooks (Information Systems: A Manager’s Guide to Harnessing Technology, v.1.4 by John Gallaugher) has been fairly good up till now.

It states:

“When technology gets cheap, price elasticity kicks in. Tech products are highly price elastic, meaning consumers buy more products as they become cheaper.”

In Austrian economics, the law of demand states that individuals will buy more as goods become cheaper, ceteris paribus. Of course, even in neoclassical economics, the law of demand states the same thing, with certain exceptions.

Price elasticity (of demand) refers to the % change in quantity divided by the % change in price. If the resulting calculation is less than -1, it is price elastic. If it is equal to -1, it is unit elastic. If it is between -1 and 0, it is price inelastic. High price elasticity would refer to an elasticity that is in the <-1 range (a large negative number).

So in layman’s terms, what exactly does this mean? For a given percentage change in price, the percentage change in quantity demanded will be very large. So for small price shifts, you can expect big changes in quantity demanded.

In other words, a fixed (yet imprecise, but I could live with that) version might say “When technology gets cheap, price elasticity kicks in. Tech products are highly price elastic, meaning consumers buy many more products as they become cheaper.”

I often have minor quibbles with textbooks that I decide not to post about, but this is something easily fixable with a few more words. The difference between high price elasticity and the law of demand is something that not just economists should be aware of, but something that managers should as well, if they’re going to be taught about it at all.

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Posted on April 13, 2013, in Economics and tagged , , , , . Bookmark the permalink. Leave a comment.

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