What Price Elasticity Depends On

Price elasticity depends on consumer awareness of available substitutes, as lack of awareness can lead to overestimation of a product's demand and subsequent market failure, such as the case of the Apple Newton, which failed to gain significant market share due to consumers' unawareness of its capabilities as a personal digital assistant.

Key Dependencies

• Consumer income — is required to determine the proportion of income allocated to a particular product, and its absence can lead to misjudging the market size, as seen in the case of the Tata Nano, which failed to sell as expected in India due to underestimating the impact of rising income on consumer preference for higher-end vehicles.
• Substitute availability — is necessary to assess the degree of competition in the market, and its absence can lead to overpricing, such as the case of De Beers, which maintained a monopoly on the diamond market by restricting supply, but eventually faced competition from Russian and Canadian diamond producers.
• Product differentiation — is crucial to determine the uniqueness of a product and its appeal to consumers, and its absence can lead to market saturation, such as the case of the smartphone market, where Samsung and Apple dominate due to their distinct product features and brand loyalty.
• Market trends — are essential to understand consumer behavior and preferences, and their absence can lead to product obsolescence, such as the case of Kodak, which failed to adapt to the shift towards digital photography and filed for bankruptcy in 2012.
• Government policies — can affect demand through taxation, regulation, and subsidies, and their absence can lead to market distortion, such as the case of the US ethanol industry, which was subsidized by the government, leading to overproduction and market glut.

Priority Order

The dependencies can be ranked in the following order:

1. Consumer awareness — as it directly affects the demand curve and market size.
2. Consumer income — as it determines the purchasing power and allocation of income to different products.
3. Substitute availability — as it affects the degree of competition and pricing strategy.
4. Product differentiation — as it influences the uniqueness and appeal of a product.
5. Market trends — as they impact consumer behavior and preferences.
6. Government policies — as they can distort the market through taxation, regulation, and subsidies, but are often outside the control of businesses.

Common Gaps

People often overlook the assumption of constant consumer preferences, which can lead to failure to adapt to changing market trends, such as the case of Blockbuster, which failed to transition from physical video rentals to online streaming and went bankrupt in 2010. Another common oversight is the assumption of perfect information, which can lead to underestimation of the impact of consumer awareness and substitute availability on demand, such as the case of the Coca-Cola New Coke launch, which failed due to consumer backlash against the change in formula.