<< Chapter < Page Chapter >> Page >

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 is utility?
Abubakar Reply
utility ordinarily means satisfaction begotten
Razzaq
Utility is the total satisfaction gotten from goods and services after consumption
Vee
Studies have fixed the short-run price elasticity of demand for HPV vaccines at (- 0.25). Suppose that transportation issues lead to a sudden cutoff of vaccine supplies. As a result, supply of HPV vaccine drop 20%. If HVP vaccines were selling for OMR 130 per dose before cutoff, how much of a pric
Sara Reply
helo
Ndinteck
what is price elasticity
Ndinteck
helo
Ajay
how are u,can we talk about some topics
Ndinteck
yes y not
Kum
what is the different between a bank loan and a bank over draft,
Ndinteck
hi
Obed
sorry I don't know
Kum
can you pls help
Kum
Give the three reasons that explain why the division of labor increases an economy’s level of production? It will surely increase because the amount of workers determine the level of work force been applied
Ebenezer Reply
what's the definition for government policy
Ebenezer Reply
Hello
Waseem
hi
Ebenezer
Hi
AKPOTU
How are you
king
am cul n u
Ebenezer
plz d answer to the question
Ebenezer
government policy Government policy is a case of action undertaken by the government or by it's agencies with a sole aim of achieving a particular goal or given end
Abdirahman
hey
Chet
government policy :refers to the action that government take in the economic field. it covers the systems for setting interest rates and government budget as well as the Labour, market, national ownership, and many other area's of government interventions into the economy
king
Nice one bro
Akoh
Thanks
king
hey
what about my definition its better bcos its general unlike this other one that is for economics only
Abdirahman
but here we all ask questions about economics bro
king
i get that but still the question is an open one no one said in Economics
Abdirahman
Hi
Dufie
yeah and your definition is 100% correct definition
king
thanks bro...your answer is perfect too
Abdirahman
Government policy describes a course of action, creating a starting point for change. They can influence how much tax the community pays, immigration status and laws, pensions, parking fines, and even where you go to school. While policies are driven to be non-discriminatory, they can affect specifi
Esther
using the graph illustrate all the types of elascity
Umar Reply
ha
Nathaniel
.
Anjali
Given the budget deficit in recent years, some economists have argued that by adjusting Social Security (SSNIT) payments for inflation using the CPI, SSNIT is overpaying recipients. Discuss the argument being made, and do you agree or disagree with it?
Louis
distinguish between increase in demand curve and extenaion in demamd curve
Farhan Reply
what are the shapes of an indifference curve?
Ovensi Reply
division of labour is simply the breaking of job functions so that each individual is engage to one set or the other for easy delivery
EMMANUEL Reply
What is division of labor
peter Reply
it is also simply the breaking down of work into various part so that each individual is entitle to one for easy delivery
EMMANUEL
it is the simplifying of tasks into smaller easily workable divisions where each person specialises on what they understand better
cabs
ok
EMMANUEL
thanks for your briefing and time
EMMANUEL
What is labour market
Daniel
What is specialisation
Nyaradzai
What is market structure
Peters
What is money and inflation
Peters
What is national income
Peters
money is a kind of exchange medium
konglan
money is something that is a medium of exchange,store of value ,measure of value and a medium of deffered payment
Koushik
inflation is a situation of cont rise in prices over a period of time
Koushik
what are the types of elasticity of demand
Asifat
Elastic and Inelastic demand
Ebenezer
what are the sources of monopoly power?
Winnerman Reply
the first source, are informations
amine
political power and influence in monetary institutions
Shahul
what is imperfect competition ?
SHAH Reply
the situation in which elements of monopoly ( R&D, EOS and stability of prices etc.) allow individual producers or consumers to exercise some control over market prices
Ghulam
how to find shut down
Sowmya Reply
where p is less than avc
Koushik
s
Shahul
which is the best public finance economics text book?
Shahul
hello
shafiullah
hello
Shahul
Yes hi
Pov
....
SHAH
what is inflation
Okosun
excess demand as compare to supply....or when tha actual demand is more than planned demand is called inflation
sj
supply
Matas
demand pull inflation
Martin
Hi
Dufie
hlo
Ebenezer
what is marginal technical rate substitution
Eze
what are the alternatives various of economic system
olaleye Reply
what is microeconomics
Ayedun
Micro-economics refers to the branch of economics which deals with smaller unit or element of the economy.
Amadu
or Is the study of individual economic unit in a economy..
Neriel
micro economis is the studay of how Households and firms make decision and they interecr it.
mahad
what is financial intermediaries?
Imran Reply
financial intermediaries are those who are link between borrowers and lenders for.eg bank... Bank is a financial intermediary
Ajit
tnx a lot of u
Imran
most welcome
Ajit
why do you here ? why do you want to learn economics
Ajit
والله العظيم انا ماعاوز اتعلمها
انا باخدها غصب عني في الكليه حضرتك
لس كدااا
I am student of ecnomics ,
Imran
Imran
Abdi
yes Abdi temam
Imran
am good too see you
Abdi
tnx why not
Imran
b/c im student
Abdi
great, now I am sleeping see u nex time ok
Imran
ok
Abdi
OK
Ajit
what is the law of dimis
Toyin Reply
what is the feature of public ownership of production factors
Toyin
what is the demand for commodity that posses identical utilities called
Toyin
law of diminishing utility...as the quantity consumed of a commodity increases,the utility derived from each successive unit goes on decreasing... condition___ consumption of other commodities remaining the same.
Malik
sorry it's...Law of diminishing marginal utility
Malik
demand for commodities that posses identical utilities? The commodities having identical utilities are perfect substitutes...and the demand for such type of commodities is called "Competitive Demand".
Malik
thanks
Toyin
Why many people can't differentiate Economists and financial analysts
Hatimu
what is the function of the central bank in an economic?
Toyin
the central bank may lend some money to banks if necessary
konglan

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask