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With all of the elasticity concepts that have just been described, some of which are listed in [link] , the possibility of confusion arises. When you hear the phrases “elasticity of demand” or “elasticity of supply,” they refer to the elasticity with respect to price. Sometimes, either to be extremely clear or because a wide variety of elasticities are being discussed, the elasticity of demand or the demand elasticity will be called the price elasticity of demand or the “elasticity of demand with respect to price.” Similarly, elasticity of supply or the supply elasticity is sometimes called, to avoid any possibility of confusion, the price elasticity of supply or “the elasticity of supply with respect to price.” But in whatever context elasticity is invoked, the idea always refers to percentage change in one variable, almost always a price or money variable, and how it causes a percentage change in another variable, typically a quantity variable of some kind.

Formulas for Calculating Elasticity
Income elasticity of demand = % change in Qd % change in income
Cross-price elasticity of demand = % change in Qd of good A % change in price of good B
Wage elasticity of labor supply = % change in quantity of labor supplied % change in wage
Wage elasticity of labor demand = % change in quantity of labor demanded % change in wage
Interest rate elasticity of savings = % change in quantity of savings % change in interest rate
Interest rate elasticity of borrowing = % change in quantity of borrowing % change in interest rate

That will be how much?

How did the 60% price increase in 2011 end up for Netflix? It has been a very bumpy ride.

Before the price increase, there were about 24.6 million U.S. subscribers. After the price increase, 810,000 infuriated U.S. consumers canceled their Netflix subscriptions, dropping the total number of subscribers to 23.79 million. Fast forward to June 2013, when there were 36 million streaming Netflix subscribers in the United States. This was an increase of 11.4 million subscribers since the price increase—an average per quarter growth of about 1.6 million. This growth is less than the 2 million per quarter increases Netflix experienced in the fourth quarter of 2010 and the first quarter of 2011.

During the first year after the price increase, the firm’s stock price (a measure of future expectations for the firm) fell from about $300 per share to just under $54. In 2015, however, the stock price is at $448 per share. Today, Netflix has 57 million subscribers in fifty countries.

What happened? Obviously, Netflix company officials understood the law of demand. Company officials reported, when announcing the price increase, this could result in the loss of about 600,000 existing subscribers. Using the elasticity of demand formula, it is easy to see company officials expected an inelastic response:

= –600,000/[(24 million + 24.6 million)/2] $6/[($10 + $16)/2] = –600,000/24.3 million $6/$13 = –0.025 0.46 = –0.05

In addition, Netflix officials had anticipated the price increase would have little impact on attracting new customers. Netflix anticipated adding up to 1.29 million new subscribers in the third quarter of 2011. It is true this was slower growth than the firm had experienced—about 2 million per quarter.

Why was the estimate of customers leaving so far off? In the 18 years since Netflix had been founded, there was an increase in the number of close, but not perfect, substitutes. Consumers now had choices ranging from Vudu, Amazon Prime, Hulu, and Redbox, to retail stores. Jaime Weinman reported in Maclean’s that Redbox kiosks are “a five-minute drive for less from 68 percent of Americans, and it seems that many people still find a five-minute drive more convenient than loading up a movie online.” It seems that in 2012, many consumers still preferred a physical DVD disk over streaming video.

What missteps did the Netflix management make? In addition to misjudging the elasticity of demand, by failing to account for close substitutes, it seems they may have also misjudged customers’ preferences and tastes. Yet, as the population increases, the preference for streaming video may overtake physical DVD disks. Netflix, the source of numerous late night talk show laughs and jabs in 2011, may yet have the last laugh.

Key concepts and summary

Elasticity is a general term, referring to percentage change of one variable divided by percentage change of a related variable that can be applied to many economic connections. For instance, the income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. The cross-price elasticity of demand is the percentage change in the quantity demanded of a good divided by the percentage change in the price of another good. Elasticity applies in labor markets and financial capital markets just as it does in markets for goods and services. The wage elasticity of labor supply is the percentage change in the quantity of hours supplied divided by the percentage change in the wage. The elasticity of savings with respect to interest rates is the percentage change in the quantity of savings divided by the percentage change in interest rates.

References

Abkowitz, A. “How Netflix got started: Netflix founder and CEO Reed Hastings tells Fortune how he got the idea for the DVD-by-mail service that now has more than eight million customers.” CNN Money . Last Modified January 28, 2009. http://archive.fortune.com/2009/01/27/news/newsmakers/hastings_netflix.fortune/index.htm.

Associated Press (a). ”Analyst: Coinstar gains from Netflix pricing moves.” Boston Globe Media Partners, LLC . Accessed June 24, 2013. http://www.boston.com/business/articles/2011/10/12/analyst_coinstar_gains_from_netflix_pricing_moves/.

Associated Press (b). “Netflix loses 800,000 US subscribers in tough 3Q.” ABC Inc . Accessed June 24, 2013. http://abclocal.go.com/wpvi/story?section=news/business&id=8403368

Baumgardner, James. 2014. “Presentation on Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget.” Congressional Budget Office. Accessed March 27, 2015. http://www.cbo.gov/sites/default/files/45214-ICA_Presentation.pdf.

Funding Universe. 2015. “Netflix, Inc. History.” Accessed March 11, 2015. http://www.fundinguniverse.com/company-histories/netflix-inc-history/.

Laporte, Nicole. “A tale of two Netflix.” Fast Company 177 (July 2013) 31-32. Accessed December 3 2013. http://www.fastcompany-digital.com/fastcompany/20130708?pg=33#pg33

Liedtke, Michael, The Associated Press. “Investors bash Netflix stock after slower growth forecast - fee hikes expected to take toll on subscribers most likely to shun costly bundled Net, DVD service.” The Seattle Times . Accessed June 24, 2013 from NewsBank on-line database (Access World News).

Netflix, Inc. 2013. “A Quick Update On Our Streaming Plans And Prices.” Netflix (blog). Accessed March 11, 2015. http://blog.netflix.com/2014/05/a-quick-update-on-our-streaming-plans.html.

Organization for Economic Co-Operation and Development (OECC). n.d. “Average annual hours actually worked per worker.” Accessed March 11, 2015. https://stats.oecd.org/Index.aspx?DataSetCode=ANHRS.

Savitz, Eric. “Netflix Warns DVD Subs Eroding; Q4 View Weak; Losses Ahead; Shrs Plunge.” Forbes.com , 2011. Accessed December 3, 2013. http://www.forbes.com/sites/ericsavitz/2011/10/24/netflix-q3-top-ests-but-shares-hit-by-weak-q4-outlook/.

Statistica.com. 2014. “Coffee Export Volumes Worldwide in November 2014, by Leading Countries (in 60-kilo sacks).” Accessed March 27, 2015. http://www.statista.com/statistics/268135/ranking-of-coffee-exporting-countries/.

Stone, Marcie. “Netflix responds to customers angry with price hike; Netflix stock falls 9%.” News&Politics Examiner , 2011. Clarity Digital Group. Accessed June 24, 2013. http://www.examiner.com/article/netflix-responds-to-customers-angry-with-price-hike-netflix-stock-falls-9.

Weinman, J. (2012). Die hard, hardly dying. Maclean's, 125(18), 44.

The World Bank Group. 2015. “Gross Savings (% of GDP).” Accessed March 11, 2015. http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS.

Yahoo Finance. Retrieved from http://finance.yahoo.com/q?s=NFLX

Questions & Answers

what are the money value
Wisdom Reply
Nothing more than a purchase power, in other words, $100 now, must have the same value after 1 year.
Carlos
what is Monopoly
Rebecca Reply
what is money
Lawal Reply
It can be define as a big transaction that can control any business for one place to another base.
Akinlo
money is recognisable note to accept both parties selling and buying
Hassan
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Rene
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Abdul
hi
Rene
money is anything generally accepted as a medium of exchange
Awwal
Money is anything generally accepted as a medium of exchange and for the settlement of goods and services .
Korda
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Tumi
discuss human and natural resources as develop strategies ro improving living condition of citizens in developing countries.
Tumi
I don't understand the question.
Naomi
it's a form of currency used for 2 or more individuals or parties in order to reach their amicable personal or business attainment. one must understand that money itself can manifest in multiple fashions for which the individuals or parties adheres.
are u trying to say we shld discuss ways in which human natural resources help in improving living condition of citizens in developing countries?
Naomi
money is a legal thunder generally accepted as a medium of exchange for the payment of debt ,goods and services
Naomi
money is a way of payment.
Carlos
money is any thing that is generally accepted as a medium of exchange good for good and settlement of debt and means of payment
Yillah
money is nothing but a object which is used for exchange of goods and services.
Harshita
money is anything that is generally accepted as payment of goods and services and settlement of debt
Rebecca
what is demand
Melissa Reply
demand is where the customer is willing and able to buy goods and services during a given period of time
idk
demand is the ability and willingness of an individual to buy goods and services at a given price in a particular period of time
Alpha
demand is the ability to buy a specific quantities of goods and services at a given price and at a specific period of time
rosemary
what are the rules of demand
rosemary
Rosemary Nsebon, Do you mean laws of demand?
Alpha
what are the rules of demand
Rene
the rule of demand is the higher the price the lower the quantity demanded and the lower the price the higher the quantity demanded
mbi
thank
Rene
what is unemployment
Rebecca
unemployment is a scenario or a phenomenon in an economy whereby people are willing are able to work but cannot a job
mbi
Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert. please I need a urgent answer
Oladosu Reply
Enables individuals and countries to consume a variety of goods and services
Iddrisu
what is the meaning of competency
Oladosu Reply
competency is an ability and courage to do something perfectly
Abdullahi
ability to perform some task
Segun
rival
Ray
thanks 🙏 it is also the same with the core competency
Oladosu
A sufficient supply
Ebenezer
Ebenezer you mean the (core competency) right?
Oladosu
what is mean,median and mode
Ikeh Reply
mean is the average number of a given data
Gallant
median is the middle number of a given data
Gallant
in a given data sorry
Mitchel
hi
Sajib
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Physcal
what are development bank in Nigeria
Adedigba Reply
.hi
Physcal
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Adedigba
hw
Physcal
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Rosie
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Rosie
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Mumtaz
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Mumtaz
hi
Charm
Payroll and​ 4p
Wasuroj
Agriculture
Wasuroj
Export
Wasuroj
Transport
Wasuroj
Change management​ and​ cerrancy
Wasuroj
Empoyee
Wasuroj
Lawyer army and​ Lawyer​
Wasuroj
animal husbandry essay
Rakuane Reply
what's the primary location of capital and money market respectively
ALIMI
what is bank
Nyakeh Reply
A bank is an institution set up purposely for the save keeping of money and other valuables
Alpha
A bank is a financial institution which helps people to save their money
Cyprian
pls define the HRM and HRP
Mumtaz
we have no money in bank....the bank owes us
Ray
When a supply curve start from the origin price elasticity of supply is unitory. Provide a simple proof
Felix Reply
Oui
Bobbo
please help someone should help me this question
Felix
ok
Anita
what is price
Divine Reply
the perchesing amount of something is called price
Nasir
OK pls tell me about economic elasticity of supply and demand
Mumtaz Reply
elasticity in economics is a measurement of the ratio of percentage change in quantity of a particular commodity to the percentage change in a factor that influence demand-price, consumer's income and price of another good
Epie
same with supply. How ever economics focus only on price elasticity of supply(PES)
Epie
using diagrams defferentiate between price ceiling and price floors
VIDELIS Reply
price ceiling lies below the equilibrium price and vice versa
Freeman
who is a broker
ALIMI Reply
a broker is a middle person between two other parties who makes all the arrangements required to conduct the the transaction.
rkesh

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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