# 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.

what is green revolution ?discuss the achievement of green revolution in India
what calculation for demand and supply
what is nationalisation
it is a process of converting private assets into public assets by undertaking the control of government or state authority
ru
anything which is widely acceptable as a medium of exchange
money ,currency
ru
Hello plz,what is the full mean of tertiary?
tertiary also called philoshper
Waseem
tertiary means third..for example primary sector ,secondary and tertiary sector... means three number..
ru
ru 9ice tnk
al
ru
tnz
al
what is money
Tettey
what is a bank
Walters
a financial institution which holds money for its clients ,which collect deposit and lend money at interest and trades generally in money...
Shabana
what is bankers draft ?kindly explain with example .
Shabana
money "anything which is widely acceptable as a medium of exchange"
Shabana
yes u ryt #shabana
Dar
difference between cost and price
Dar
Shallow definition
cost"the value of input that is the amount of money which is used to produce a good or service . price"an amount of money which has to b paid to buy something.
Shabana
Tertiary is an adjective(pre position) for stages or levels and refers to "top, final, full term ." ; Advanced.
Anderson
bank draft is a type of cheque which a person buy for to pay someone who is not willing to accept a personal cheque .
ru
tertiary sector is an providing any kind of services.
primary sector is 'agriculture', secondary sector is ' industrial sector ,and the tertiary sector is ,' service sector' ,
Dharam
what is occupational structure
occupational structure refers to the distribution of occupation on the basis of educational ,socoial ,income level in a society or economy
ru
no that is not a exact meaning
than what is exact meaning
Dharam
It refers to also the what is the average income of the person
what is deficit
deficit = expenses > revenue
Waseem
yeah expenses over revenue results in deficit
Paulina
insufficiency
Anderson
What is What is Equilibrium
from business point of view it is that point where business revanu are equal to its expenses.
ru
in economy where demand is equal to supply is called equalibrium
ru
Equilibrium in economics is where quantity demanded is equal to quantity supplied
Collins
what are the objectives of devaluation
Oyedun
how the government solve the problem of scarcity
how government solve the problem of scarcity
SUNDAY
by deciding the output limit for every industry and providing resources to these industries according to output limit .the problem can be solved
ru
and by controlling the activity of production like as a mixed economy this problem can be solved
ru
by proper planning to cater the needs of people, demand & supply process may prove helpful. and by imposing heavy import duty on the product to shift the demand towards available alternative sources.
Abida
changing the methods of production, and tax system
Khushal
In problems of scarcity government should adopt a plan or state budget, form a long term policy , deal with corruption , mobilise resources ,systems and monitor.
Anderson
by doing various plans or scheme and providing various kind of free or in less price to the needy people
Plx anyone explain bankers draft by giving example.
Shabana
what is price elasticity of demand?
price elasticity of demand is the percentage in quantity demanded of a good or service to the percentage change in its price.
Cobbina
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes.
TOHEEB
Price elasticity of Demand is a prepotionat change in the demand due to change in price of the goods and service
Dawal
what is monopoly and monopolistic?
KPAAKPA
Price elasticity of demand is the economy measure to show the responsiveness and change in price due to change in quantity.
Lomayani
what is economics
one simple reason to build format in level great leverage for better control knowing grown level greater with word trade..
Larod
Any one who can assit me with Multiplier
Wendy
Yeah sure
Aqrar
You mean Multiplier effect!5
Aqrar
ECONOMICS IS THE STUDY OF ECONOMIC ISSUES OR (ECONOMIC PROBLEMS)ARUSING OUT OF THE FACT THAT RESOURCES ARE SCARCE IN RELATION TO OUR NEEDS,DESIRES OR WE CAN SAY THAT RESOURCES ARE LIMITED OR WANTS ARE UN LIMITED HOW CAN WE UTILIZE LIMITED RESOURCES FOR SETESFY OUR WANTS
Nazneen
is called economics
Nazneen
is call economist
KPAAKPA
then
Nazneen
Economics is all about management of scarce resources. In other words its is about efficience.
Aqrar
Nazneen lets discuss some advance concepts and models
Aqrar
I.can see you have good concepts of Econ
Aqrar
what is multiplier
Wendy
@Wendy A phenomenon whereby a given change in a particular input, such as government spending, causes a larger change in an output, such as gross domestic product.
Aqrar
economic is social science that deal with the human behavior as a difference b/ween earth and scale.
jacob
Economics is a science that studies human behaviour in relation to ends and scarce means which have alternative uses
Collins
economics is a social science that deal with human behavior in aspect of end and scarce and the alternative use
Chibuzor
pls I want to known the difference between inflation and deflation, what is there difference ?
jacob
economics is the study of how man used scarce recourse to satisfy human wants
abdullahi
inflation is the increase in the general price level while deflation is decrease in general price level.
Azhar
evening,dear friends. I'm very glad to be one of you so will you please give me full imformaton about economics epically the time table of the first year of the univerysity
abdullahi
hi iam from india
Naa
economic is the study of human behavior, want by professor Robert say is all about choice and want
KPAAKPA
what is SCARCITY?
KPAAKPA
Scarcity is the limitation of resources within the economy
karl
means that human wants for goods, services and resources exceed what is available
KPAAKPA
Scarcity is inefficient resources to satisfy human want.
Pat
inflation can define as general rise in the price due to too much money in circulation, while is the decrease of the price of goods due to low money in circulation.
Musa
what is the law of dimension return?
jacob
Jacob it's diminishing return
The
The study of house hold management and money measurements
Wardan
hi
Augustine
what is mearnt of economies of scale..pls asist me
Augustine
hii
Vimarsh
when larger amount of output is produced , per unit input costs tend to fall , heading towards economiea of scale ..by acale we mean scale of production here
Vimarsh
economies# scale#
Vimarsh
alright thank u..what are its advantages
Augustine
the cost of production is low and more efficient
Vimarsh
What is demand?
Bright
demand is the various goods and services consumers are willing and able to purchase at a particular price
Paulina
What is inflation
Bright
Economics is a social science focusing on the economy and its agents in production,distribution,buying and selling involving resources such as raw materials and labour at micro ie individual or family and macro ie aggregate or total and state levels . There are several forms or brands or approache
Anderson
scarcity means non availability things or resources which satisfy humans
demanding the various goods and services which satisfy humans needs
when we calculate shortage and surplus why do we subtract quantity demanded from quantity supplied
to determine surplus
Concepcion
true using of graphs
jacob
because we try to avoid negative answers
Eric
what is price ceiling
price ceiling is a government-imposed price control, or limit, on how high a price is charged for a product. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive.
Rina
price effect= Income Effect+ Substitution Effect
Well described Rina
Aqrar
why average revenue is equal to price in monopoly market?
Because One person get the monopole on demand market without any concurrence
Christian
hlw
Luman
hlw
Sheikh
Black money comes from black mark