Economics of Software (Part 1): Why Traditional Economics Concepts Don’t Apply To Software

I originally published this article on Mind the Product. This article only contains the excerpt of the original article, you can read the original article here.

I feel Product Manager is an intersection of Technology, User Experience, and Business. When it comes to technology and user experience, there are many academic materials available. Even for business, you could do an MBA or go through equivalent coursework. However, when it comes to economics, especially Microeconomics, there are very few resources and case studies focused on the software industry. Most of the examples you will find are about traditional sectors like mining, manufacturing, FMCG, etc., where 'labor force' is directly proportional to 'quantity manufactured.’ But it does not apply to the software industry. Once you have a product, you can make infinite copies of it. Hence, traditional concepts of economics are not directly applicable to the software industry.

This series focuses on bridging the traditional microeconomics concepts with the software industry to improve efficiency. It has four parts:

1. Part 1: Why traditional economics concepts do not apply to software?
2. Part 2: Elasticity explained for software products
3. Part 3: When to invest in infrastructure
4. Part 4: Measuring the efficiency of product teams using the output curve

Throughout the series, I tried my best to represent Microeconomics fundamentals in the software industry, and I hope it will certainly help you understand overall operations. Feel free to share your feedback at nihar@sawant.me. I am more than happy to hear your thoughts.

The first part is on the most famous Microeconomics topics Supply, Demand (and Market Equilibrium). First, let's understand the concepts before we apply them to the software industry.