Cambridge Days

Punch-drunk microeconomics, and the price inelasticity of fruitcake

The week before last was exams – a one-two punch of Corporate Finance and Organizational Behavior. I was swaying on my feet the moment I stumbled out of Cambridge’s Small Exam Hall, but then Az and I went and saw ‘Million Dollar Baby’, which pretty much knocked me out for the whole weekend. (Okay, boxing metaphor is corny, but damn if it isn’t apt.)

I’ve barely recovered. Lent term began promptly on Monday morning, which means I’m now fully back in business (school), and once again filling my cranium with executive-class knowledge.

Take, for example, this gem that cropped up during an Operations Management discussion: “The Price Inelasticity of Fruitcake” – i.e., as the price of fruitcake goes up, the demand for fruitcake doesn’t really drop. This atypical behavior occurs because fruitcakes aren’t bought for personal consumption – rather, they’re used solely as gift-items for unfortunate relatives.

Ergo, since the only way a buyer can measure the worth of a fruitcake is by looking at the price tag, bumping up the MSRP actually manages to increase the perceived value of said fruitcake. This, in turn, boosts demand for fruitcake-gift-object, and all in such a way as to offset any drop in demand due to some buyers being priced out of the fruitcake market, etc. etc.

I trust this explains why I haven’t blogged much, lately.

iMac at the Wren Library (not JBS)

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