<< Chapter < Page Chapter >> Page >

Netflix on-demand media

Photo of the Netflix Watch Instantly tab to watch movies and TV episodes instantly via streaming media
Netflix, Inc. is an American provider of on-demand Internet streaming media to many countries around the world, including the United States, and of flat rate DVD-by-mail in the United States. (Credit: modification of work by Traci Lawson/Flickr Creative Commons)

That will be how much?

Imagine going to your favorite coffee shop and having the waiter inform you the pricing has changed. Instead of $3 for a cup of coffee, you will now be charged $2 for coffee, $1 for creamer, and $1 for your choice of sweetener. If you pay your usual $3 for a cup of coffee, you must choose between creamer and sweetener. If you want both, you now face an extra charge of $1. Sound absurd? Well, that is the situation Netflix customers found themselves in—a 60% price hike to retain the same service in 2011.

In early 2011, Netflix consumers paid about $10 a month for a package consisting of streaming video and DVD rentals. In July 2011, the company announced a packaging change. Customers wishing to retain both streaming video and DVD rental would be charged $15.98 per month, a price increase of about 60%. In 2014, Netflix also raised its streaming video subscription price from $7.99 to $8.99 per month for new U.S. customers. The company also changed its policy of 4K streaming content from $9.00 to $12.00 per month that year.

How would customers of the 18-year-old firm react? Would they abandon Netflix? Would the ease of access to other venues make a difference in how consumers responded to the Netflix price change? The answers to those questions will be explored in this chapter: the change in quantity with respect to a change in price, a concept economists call elasticity.

Introduction to elasticity

In this chapter, you will learn about:

  • Price Elasticity of Demand and Price Elasticity of Supply
  • Polar Cases of Elasticity and Constant Elasticity
  • Elasticity and Pricing
  • Elasticity in Areas Other Than Price

Anyone who has studied economics knows the law of demand: a higher price will lead to a lower quantity demanded. What you may not know is how much lower the quantity demanded will be. Similarly, the law of supply shows that a higher price will lead to a higher quantity supplied. The question is: How much higher? This chapter will explain how to answer these questions and why they are critically important in the real world.

To find answers to these questions, we need to understand the concept of elasticity. Elasticity is an economics concept that measures responsiveness of one variable to changes in another variable. Suppose you drop two items from a second-floor balcony. The first item is a tennis ball. The second item is a brick. Which will bounce higher? Obviously, the tennis ball. We would say that the tennis ball has greater elasticity.

Consider an economic example. Cigarette taxes are an example of a “sin tax,” a tax on something that is bad for you, like alcohol. Cigarettes are taxed at the state and national levels. State taxes range from a low of 17 cents per pack in Missouri to $4.35 per pack in New York. The average state cigarette tax is $1.51 per pack. The 2014 federal tax rate on cigarettes was $1.01 per pack, but in 2015 the Obama Administration proposed raising the federal tax nearly a dollar to $1.95 per pack. The key question is: How much would cigarette purchases decline?

Taxes on cigarettes serve two purposes: to raise tax revenue for government and to discourage consumption of cigarettes. However, if a higher cigarette tax discourages consumption by quite a lot, meaning a greatly reduced quantity of cigarettes is sold, then the cigarette tax on each pack will not raise much revenue for the government. Alternatively, a higher cigarette tax that does not discourage consumption by much will actually raise more tax revenue for the government. Thus, when a government agency tries to calculate the effects of altering its cigarette tax, it must analyze how much the tax affects the quantity of cigarettes consumed. This issue reaches beyond governments and taxes; every firm faces a similar issue. Every time a firm considers raising the price that it charges, it must consider how much a price increase will reduce the quantity demanded of what it sells. Conversely, when a firm puts its products on sale, it must expect (or hope) that the lower price will lead to a significantly higher quantity demanded.

Questions & Answers

how do lower interest rates affect investment
meek Reply
which capital is best and why
Sanju Reply
outline 4 reasons why public corporation are establush
Ophelia Reply
how does the foreign currency rate affect to your needs and wants?
Donna Reply
a country can not produce everything so it needs to import some of those thing and once the currency rate becomes high we can not import as much as we can
for instance let's say $1=R4 with R16 we can import more goods than when $1=R8
Difference between needs and want?
Tijani Reply
what is a price mechanism
Johnny Reply
dis Is same as market market mechanism... it is the process by Wch a market solves a problem allocating resources especially deciding how much a good shld be produced
it is the shift of the demand curve to the left....which shows that less of a commodity is demanded
Sarpong Reply
what is unemployment
what is meant by a decrease or fall in demand
Lower the demand i.e, lower the consumption
dat is a shift in demand curve
what is industrialization
Santa Reply
Industrialization is the process by which an economy is transformed from primarily agricultural to one based on the manufacturing of goods. Individual manual labor is often replaced by mechanized mass production, and craftsmen are replaced by assembly lines.
industrialisation is the period of social and economic change that transforms a human group from an agrarian society into an industry society..involving extensive reorganization of an economy for the purpose of manufacturing
What is monopoly
Nancy Reply
monopoly is market structure
monopoly is a market structure where there is only one producer or seller of a commodity
monopoly is a market where there is only one seller
And the product has no substitute
is type of market where there are only one seller with no close substitute
has no substitute because only producer of the product in market
thanks, its true
what's the summary meaning of economic
what is money as used in economics
Fri Reply
store of value ,unite of account ,
Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another
money is anything that is generally accepted by the citizens of the country to carry out the transactions of good and services for example CFAF which is generally accepted by the citizens of Cameroon to carry out good and services.
money is anything which is generally accepted by each and every person in order to purchase goods and services to fulfill his/her need or requirements
money is anything dat is generally acceptable as a medium of exchange Nd settlement of debts
how those the government obtain economic objectives?
Santa Reply
how do commercial bank create credit
Santa Reply
commercial bank accept the deposit from the people and provide it to the needy person in the form of credit by keeping a part of deposit as reserve.
how did bank see profit
Toheeb Reply
banks do see their profit in the interest that customers do pay when they receive lone from the Bank
banks get profit from loans, maintenance fees and charges for internet banking, etc.
charges on bank transactions as well
factors that cause abnormal demand curve
Samuel Reply
when the good is a luxurious good
abt 5 cause
when the good is outmoded.No matter how their prices are lower the dd. for them will be low
seasonal goods such x-mas card during x-mas season
existence of some fixed assets, rising wages, target income, monopolistic practices

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?