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

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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.

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

## 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.

#### Questions & Answers

how environment affect demand and supply of commodity ?
Wht at the criteria for market ?
Amos
what is difference between monitory policy and fiscal policy?
monetary policy is a policy thrust by National Govt(CBN) to influence government spending, purchase &taxes
Frank
necessity of economics
I will say want,choice,opportunity cost,scarcity,scale of preference
Alao
what is monopoly market.How price output are determined under monopoly market
bisham
b) Monopoly market is an impecfect market where s single firm having the innovation to produce a particular commodity.Prices are determined through output since there are no other competitive.
Frank
Monopoly market:firm has market power & does not respond to market price
Frank
Explain the process of price determination under perfect competition market with suitable diagram
Price determination under perfect competition via this process :firms have no market power to influence price rather firms respond to market price.
Frank
price is different from demand- demand is amount of commodity
demand is amount /quantity of commodity a potential buyer is willing to buy at a given price at market
Frank
demand is a desire of customer on commodity with the ability to pay it and willing to buy it at given price of commodity
Harika
demand is price of what
show that shortrun average cost
what is economics
what is money
Mbah
what is money
Mbah
Difine macro economics
agaba
money is a medium of exchange between goods and services,maybe inform of currency.
Wesonga
Economics is study of how human beings strive to satisfy numerous wants using limited available resources.
Wesonga
how do you find the maximum number of workers the firms should employ order to produce where there are increasing returns
Jane
what are implications of computing national income?.
agaba
pl
MUDASIRU
what is the formulae for calculating national income
MUDASIRU
it calculated by value added method
Praveen
classify the production units like agriculture, banking, transport etc
Praveen
money is anything that is generally acceptetable for human
Ogbaji
Estimate the net value added(NVA) at fixed cost by each industrial structure
Praveen
definition of unemployment
what are the causes of unemployment?
The main causes of unemployment are listed below. 1. Frictional unemployment 2. Cyclical unemployment 3. Structural unemployment
assani
We can also categorize the causes on a broader sense as: 1. Political and 2. Social cause As unemployeement root causes are embaded in this two.
Yonathan
would opportunity cost exist if there was no scarcity?
assani
yes just because the opportunity cost arose when there is Alternative to choose among the alternatives.
I am thinking that, if our resources were unlimited, then there wouldn't be any need to forgo some wants. Hence the inexistence if opportunity cost
assani
Politics
Job
politics has done what?
assani
consider time assani
Mary
I'm Emmanuel,...I taught the main cause is the change in gov't.
Emmanuel
...Lack of capital to set up a firm respectively
Emmanuel
🙈
Emmanuel
I would like to bring in Educational levels can also be the cause the cause of the problem respectively
Emmanuel
I think the main causes of unemployment is lack of INFRASTRUCTURAL DEVELOPMENT OVER POPULATION OVER DEPENDENT ON GOVERNMENT LACK OF SELF EMPOWERMENT...
ananti
lack of skills among the new generation is the serious issue.
Vishal
Where I come from , I don't see why education or personal aspects seem to do with unimployment, technically the motivation and eigerness in all works of live is there , dispite the cultural influence and physical bearriors;the thing we lacking is Government Support and open market ethics.
Joe
sorry about that-(repation). We have a over powering ethical political system that's displacing the marketing asspects of economy and causing large scale unemployment right across the board...
Joe
can someone Explain Expansionary Monetary Policy and Contractionary Monetary Policy Using one of the instrument of Monetary Policy? Please am kinda lost here?. ta
using a graph show the case of substitute and compliment goods
can anyone give me a simple explanation to Five Sector Macroeconomics?
Emmanuel
Can someone please define what economics is
economics simply is a social science subject that study human behavior.
dajan
economics is a social science which studies human behaviour as a relationship between ends and scarce means that has alternative uses
Alao
Can someone please tell me how to calculate GDP
Emmanuel
emmanual kapal to calculate GDP (Gross Domestic Product) has three method in calculating it (1)income approach (2) expenditure approach (3) value added method
Alao
thanks Alae
Emmanuel
u are welcome
Alao
in basic terms economics is revered to as battery system, it date back to when Men sees the need to exchange sapless goods and produce to gain , either wealth , basic necessities or to establish trading ties for personal benefit or social asspects in terms of coexistence and continuity, future .
Joe
what is the law of demand
keep other thing constant, when the price increases demand decrease when the price decreases demand increases of the commodity.
sj
all things being equal,quantity demanded decrease as price increase and increase as price decrease
Seth
there's practial joke to it ..." the higher the demand ; scarcity, increase in production and drop in quality"... quite the controversy - for example China vs Europe, United States and we are all boxed up in between somewhere...
Joe
Other thing remain constant the low price of commodity the high quantity of commodity and vice versa is true
Baraka
Explain Effective demand
What is effective demand
Anita
like Modi is in demand...best example of effective demand
Pranav
Don't get you
Anita
Anita you mean you don't get me or who?
Onyeking
level of demand that represents a real intention to purchase by people with the means to pay
Pranav