{"id":5157,"date":"2016-07-20T21:04:56","date_gmt":"2016-07-20T21:04:56","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/microeconomics\/?post_type=chapter&#038;p=5157"},"modified":"2016-07-20T21:04:56","modified_gmt":"2016-07-20T21:04:56","slug":"why-it-matters-elasticity","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/chapter\/why-it-matters-elasticity\/","title":{"raw":"Why It Matters: Elasticity","rendered":"Why It Matters: Elasticity"},"content":{"raw":"<h2>Why measure how changes in price, income, or other factors\u00a0affect the behavior of buyers and sellers?<\/h2>\nImagine going to your favorite coffee shop and having the waiter inform you that 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's the situation Netflix customers found themselves in\u2014facing a 60 percent price hike to retain the same service.\n\n[caption id=\"attachment_6519\" align=\"aligncenter\" width=\"500\"]<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1511\/2016\/06\/27175051\/2655128664_302f3a5b47_b.jpg\" rel=\"attachment wp-att-6519\"><img class=\"wp-image-6519\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/343\/2016\/07\/20205942\/2655128664_302f3a5b47_b-1024x683.jpg\" alt=\"This is a photograph of Netflix packaging.\" width=\"500\" height=\"333\"\/><\/a> <strong>Netflix On-Demand Media<\/strong>. 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.[\/caption]\n\nIn 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 percent. How would customers of the fourteen-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? In this module, the answers to these questions\u2014about the change in quantity with respect to a change in price\u2014will be explored through a concept economists call <em>elasticity<\/em>.\n\nElasticity measures the behavioral response of economic agents in a given situation.\u00a0Here are some examples:\n<ul><li>If a business raises its prices, will that have a large or small impact on demand?<\/li>\n\t<li>If you get a pay raise, how much more will you spend on food, clothing or entertainment?<\/li>\n\t<li>If hot dogs go on sale at the grocery store, how much additional mustard will consumers purchase?<\/li>\n\t<li>If the local Italian restaurant puts their pizza on sale, will the additional number of pizzas sold offset the discount on each item? \u00a0In other words, will their sales revenues for pizza go up or down?<\/li>\n<\/ul>\nThese are important real-world questions that we'll study in this module.\n\n<span style=\"line-height: 1.5;\">Also,\u00a0before we get into the details: It can be easy to get hung up on\u00a0the math of elasticity calculations. Learning to do these\u00a0calculations is an important part of applying the elasticity\u00a0principle, but the math will seem more intuitive if you master\u00a0concept first: Understanding what elasticity means in a particular context will help you see what you're trying to calculate.\u00a0<\/span>\n<h3>Learning Outcomes<\/h3>\n<ul><li>Explain\u00a0the concept of elasticity<\/li>\n\t<li>Explain the price elasticity of demand and price elasticity of supply, and compute both using the midpoint method<\/li>\n\t<li>Explain and calculate other elasticities using common economic variables<\/li>\n\t<li>Explain the relationship between a firm's price elasticity of demand and total revenue<\/li>\n<\/ul>","rendered":"<h2>Why measure how changes in price, income, or other factors\u00a0affect the behavior of buyers and sellers?<\/h2>\n<p>Imagine going to your favorite coffee shop and having the waiter inform you that 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&#8217;s the situation Netflix customers found themselves in\u2014facing a 60 percent price hike to retain the same service.<\/p>\n<div id=\"attachment_6519\" style=\"width: 510px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1511\/2016\/06\/27175051\/2655128664_302f3a5b47_b.jpg\" rel=\"attachment wp-att-6519\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-6519\" class=\"wp-image-6519\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/343\/2016\/07\/20205942\/2655128664_302f3a5b47_b-1024x683.jpg\" alt=\"This is a photograph of Netflix packaging.\" width=\"500\" height=\"333\" \/><\/a><\/p>\n<p id=\"caption-attachment-6519\" class=\"wp-caption-text\"><strong>Netflix On-Demand Media<\/strong>. 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.<\/p>\n<\/div>\n<p>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 percent. How would customers of the fourteen-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? In this module, the answers to these questions\u2014about the change in quantity with respect to a change in price\u2014will be explored through a concept economists call <em>elasticity<\/em>.<\/p>\n<p>Elasticity measures the behavioral response of economic agents in a given situation.\u00a0Here are some examples:<\/p>\n<ul>\n<li>If a business raises its prices, will that have a large or small impact on demand?<\/li>\n<li>If you get a pay raise, how much more will you spend on food, clothing or entertainment?<\/li>\n<li>If hot dogs go on sale at the grocery store, how much additional mustard will consumers purchase?<\/li>\n<li>If the local Italian restaurant puts their pizza on sale, will the additional number of pizzas sold offset the discount on each item? \u00a0In other words, will their sales revenues for pizza go up or down?<\/li>\n<\/ul>\n<p>These are important real-world questions that we&#8217;ll study in this module.<\/p>\n<p><span style=\"line-height: 1.5;\">Also,\u00a0before we get into the details: It can be easy to get hung up on\u00a0the math of elasticity calculations. Learning to do these\u00a0calculations is an important part of applying the elasticity\u00a0principle, but the math will seem more intuitive if you master\u00a0concept first: Understanding what elasticity means in a particular context will help you see what you&#8217;re trying to calculate.\u00a0<\/span><\/p>\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Explain\u00a0the concept of elasticity<\/li>\n<li>Explain the price elasticity of demand and price elasticity of supply, and compute both using the midpoint method<\/li>\n<li>Explain and calculate other elasticities using common economic variables<\/li>\n<li>Explain the relationship between a firm&#8217;s price elasticity of demand and total revenue<\/li>\n<\/ul>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-5157\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Why It Matters: Elasticity. <strong>Authored by<\/strong>: Steven Greenlaw and Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Netflix Envelope. <strong>Authored by<\/strong>: Marit &amp; Toomas Hinnosaar. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/hinnosaar\/2655128664\/\">https:\/\/www.flickr.com\/photos\/hinnosaar\/2655128664\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":18,"menu_order":1,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Why It Matters: Elasticity\",\"author\":\"Steven Greenlaw and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Netflix Envelope\",\"author\":\"Marit & Toomas Hinnosaar\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/hinnosaar\/2655128664\/\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-5157","chapter","type-chapter","status-publish","hentry"],"part":5155,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/chapters\/5157","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/wp\/v2\/users\/18"}],"version-history":[{"count":1,"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/chapters\/5157\/revisions"}],"predecessor-version":[{"id":5223,"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/chapters\/5157\/revisions\/5223"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/parts\/5155"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/chapters\/5157\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/wp\/v2\/media?parent=5157"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/pressbooks\/v2\/chapter-type?post=5157"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/wp\/v2\/contributor?post=5157"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/wp-json\/wp\/v2\/license?post=5157"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}