Carlos Cruz Price Elasticity Scenario

Carlos Cruz is an inventor and entrepreneur who developed and patented a proprietary technology that takes the printed word for text materials and creates a file with the option of reading it digitally or listening to it with a realistic synthetic voice (UoP, 2011). Carlos business is focused on selling these digital books online and is convinced on the potential success of his business. However, he is facing a dilemma concerning how to appropriately price his product. This paper briefly covers certain economic principles and evaluates Carlos’ dilemma and compares it to this principles.

SCARCE RESOURCES

The concept or reality of scarce resources is fundamental to economics. Resources include land, labor, capital and entrepreneurial ability. In simple words, because “we can’t have it all” due to our resources being limited, we must decide what we will have and what we must do without. Similarly, the scenario presents various resource options Carlos can use to digitize books. Carlos must decide between continuing to do the work himself or outsourcing it in Puerto Rico at approximately $10 an hour or overseas at $2 an hour. Carlos realizes that his own capacity to continue to digitize books is limited or scarce and a poor use of his time.

Carlos’ decision must also include a marginal analysis. Will the marginal benefit of outsourcing exceed its marginal cost? Clearly, the benefit lies in freeing up Carlos’ time to engage in other areas of his business. On the other hand, outsourcing could increase the front up cost of digitizing books potentially affecting the selling price or Carlos’ profit. However, digitizing books is a one-time task and its cost will be diluted as sales of any particular book increases.

ECONOMIZING PROBLEM

The economizing problem goes hand in hand with the scarce resources catch phrase of “we can’t have it all,” although from a different perspective. We can’t have everything we want because we don’t have the amount of income needed to meet our “wants.” Therefore, the economizing problem represents “the need to make choices because economic wants exceed economic means” (McConnell & Brue, 2008). Consequently, from the wealthiest individuals and countries to those individuals with the lowest annual income, all of us must decide how to spend our limited income to satisfy our unlimited wants. Anything that exceeds our budget becomes unattainable; therefore tradeoffs and choices must be considered.

In line with this economizing problem, Carlos must estimate what his “limited income” will be in order to evaluate and establish tradeoffs and choices for his “unlimited wants.” Unlike his previous fixed annual salary of $200,000, his business’ limited income will continuously fluctuate in different directions and be dependent on his decision on product price. His volume sales, other things equal, will also depend on product price. Therefore, Carlos must offer a unique product at a competitive price.

PRICE ELASTICITY OF DEMAND

“The law of demand tells us that consumers will buy more of a product when its price declines and less when its price increases” (McConnell & Brue, 2008). Increasing the product price based on Elsa’s suggestion and experience not only violated this law, it also violates the economic principle of _generalization._ In a competitive market, other things equal, Elsa’s idea that sales volume will increase with a price increase is incorrect. The expensive artwork sold by Elsa can be perceived by the buyer as being of high quality or from a renowned artist, consequently resulting in an increase in volume sales. In the digital books market, buyers will most likely buy the lowest cost option as quality differences are little or irrelevant in this type of product. There are some highly competitive markets, such as computers, where sellers such as Apple have increased their sales through effective marketing and quality products in spite of their product’s high cost. However, making generalized comparisons between two completely different markets is like comparing apples and oranges

Based on price elasticity, increasing the price of the digital books will most likely elastically decrease the volume of sales. The response will most likely not be inelastic as it would probably suggest that digital books are something that meets a basic consumer need (i.e. milk, bread, toothpaste, etc.) and is not affected by price changes.

CONCLUSION

Regardless of how unique Carlos thinks his product is, he must carefully evaluate the cost selection of his products. If he can provide a higher quality and attractive product at a competitive price, then chances are that he will succeed. Following Elsa’s advice based on incorrect generalization will most definitely rob him of his well-deserved success.

References

McConnell, C. R. & Brue, S. L. (2008). _Economics: Principles, problems, and policies_ (17th ed.). Boston: McGraw Hill/Irwin.

University of Phoenix (2011). Carlos Cruz’s Price Elasticity Scenario. Retrieved from https://portal.phoenix.edu/classroom/coursematerials/eco_561pr/20111122/ /