5.4 Elasticity in areas other than price  (Page 3/15)

 Page 3 / 15

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.

 $\begin{array}{rcl}\text{Cross-price elasticity of demand}& =& \frac{\text{% change in Qd of good A}}{\text{% change in price of good B}}\end{array}$ $\begin{array}{rcl}\text{Wage elasticity of labor supply}& =& \frac{\text{% change in quantity of labor supplied}}{\text{% change in wage}}\end{array}$ $\begin{array}{rcl}\text{Wage elasticity of labor demand}& =& \frac{\text{% change in quantity of labor demanded}}{\text{% change in wage}}\end{array}$ $\begin{array}{rcl}\text{Interest rate elasticity of savings}& =& \frac{\text{% change in quantity of savings}}{\text{% change in interest rate}}\end{array}$ $\begin{array}{rcl}\text{Interest rate elasticity of borrowing}& =& \frac{\text{% change in quantity of borrowing}}{\text{% change in interest rate}}\end{array}$

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:

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.

1. Division of labour increases the quality of output 2. it brings about specializations where a worker has an advantage of his area of competence. 3. The pay you get help you to buy the goods and wants
1. to make choice in the face of scarcity 2. specializations 3.division of labour
Becky
Human wants and needs are numerous but the resources available are limited in supply.
Becky
The maximum amount of ham the residents will consume in a month is 30000
Becky
it makes economic sense to her because she works to get paid. since she cannot produced vegetables,
Becky
A computer systems engineer only specialized in his field of study as a computer engineer not a painter. so he needs to get the service of a painter to paint his house and he will pay for the service of the painter
Becky
the kitchen will produce more meals because there is division of labour and area of expertise
Becky
division of labour without trade will not work because there is no training in a particular field
Becky
it also increase productivity
Asiedu
or increase productivity
Asiedu
how to print
what is flow variable
a flow is a quantity that can be measured over a specific period of time
Abhishek
is economics a social science or a pure science
social science
Sammy
social science
Babarali
social Science as a Subject and Pure science as a study
Abhishek
How to compute National income by using the expenditure approach
explain the method?
Sammy
hy
C+I+G+(X-M) C= Consumption Expenditure I= Investment Expenditure G= Government Expenditure X-M = Net Export
Abhishek
hw r u..?
Sharat
am good
lukimia
o nice
please I need a guardian on this topic
Albert
What do you need? Maybe we can help
Annisa
What's going on here?
Ivan
l need some information about macroeconomic
Sharat
Ivan
any lecturer in here?
Albert
yes !! am here !! Lecturer of Economics And Statistics
Abhishek
niguse
I need help in statistics my lecturer is too fast at times I dont understand
Diana
Y=C+I+G+NX
Ayesha
Briefly explain whether the discipline of economics is a social science or pure science( normative or positive)
Sammy
mathematical economics
show some questions under this topic
hassan
why met worth is added with libilitys in the balance sheet
what are the implications of inflation targeting?
maximize profit
Murry
What happens to the goods and money market if the government cuts public spending?
then the government will be punished by the public
soul
GDP, INFLATION, UNEMPLOYMENT & PRODUCTIVITY and then write a paragraph on the behavior of each variable after analyzing them graphically.
AWY
International trade is the exchange of capital, goods, and services across international borders.
Bilal
international trade is the exchange of goods and services across boundaries
Zamu
international trade is the exchange of goods and services of country and abroad
Uwase
international is the process of exchanges of value interm of goods and services along national frontier
Murry
Murry
Increase knowdge and skill. it save time and cost. Increase high Efficiency of production .
List kinds of Elastcity of Demand
betta
Is a faster rate of economic growth always a good thing as compared to a slower rate? And why?
what is unemployment
it is a situation during which workers remain jobless.
Zeeshan
is situation where people are willing to work but job are no available
Uwase