{"id":5961,"date":"2016-07-19T18:00:34","date_gmt":"2016-07-19T18:00:34","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/macroeconomics\/?post_type=chapter&#038;p=5961"},"modified":"2016-07-19T18:00:34","modified_gmt":"2016-07-19T18:00:34","slug":"putting-it-together-elasticity","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/chapter\/putting-it-together-elasticity\/","title":{"raw":"Putting It Together: Elasticity","rendered":"Putting It Together: Elasticity"},"content":{"raw":"<h2>Summary<\/h2>\nThe goal of this module was to explain the importance\u00a0of elasticity. You learned how to:\n<ul><li>Define the 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\u2019s price elasticity of demand and total revenue<\/li>\n<\/ul><h2>Netflix Pricing Revisited<\/h2>\nWe began this module discussing a price change that Netflix imposed\u00a0on its customers. Now that we understand price elasticity, we can better evaluate that case. How did the 60 percent price increase end up for Netflix? It was\u00a0a very bumpy two-year ride. Before the price increase, there were about 24.6 million U.S. subscribers. After the price increase, 810,000 infuriated customers\u00a0canceled 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\u2014an 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.\n\nDuring 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. By June 2013, the stock price had rebounded to about $200 per share\u2014still off by more than one-third from its high, but definitely\u00a0improving. What happened? Obviously, Netflix\u00a0understood the law of demand. Company officials reported, when they announced the price increase, that this could result in the loss of about 600,000 existing subscribers. Using the elasticity of demand formula, it is easy to see that they expected an inelastic response:\n\n<img class=\"alignnone\" style=\"display: block; margin: auto;\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/342\/2016\/07\/19174624\/autogen-svg2png-001111.png\" alt=\"Worked example of the elasticity of demand formula. Calculations are as follows. -600,000 divided by the sum of 24 million plus 24.6 million divided by 2. This number should then be divided by the following: $6 divided by the sum of $10 plus $16 divided by 2. This yields 0.05.\" width=\"255\" height=\"109\"\/>\n\nIn addition, Netflix officials had expected\u00a0that 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 that this was slower growth than the firm had experienced over the past year\u2014about 2 million per quarter. Why was the estimate of customers leaving so far off? During the fourteen years after\u00a0Netflix was\u00a0founded, 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.\n\nJaime Weinman reported in <span class=\"emphasis\"><em>Maclean's<\/em><\/span> that Redbox kiosks are \"a five-minute drive or 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 target\u00a0of numerous late-night talk-show jabs and laughs in 2011, may yet have the last laugh.","rendered":"<h2>Summary<\/h2>\n<p>The goal of this module was to explain the importance\u00a0of elasticity. You learned how to:<\/p>\n<ul>\n<li>Define the 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\u2019s price elasticity of demand and total revenue<\/li>\n<\/ul>\n<h2>Netflix Pricing Revisited<\/h2>\n<p>We began this module discussing a price change that Netflix imposed\u00a0on its customers. Now that we understand price elasticity, we can better evaluate that case. How did the 60 percent price increase end up for Netflix? It was\u00a0a very bumpy two-year ride. Before the price increase, there were about 24.6 million U.S. subscribers. After the price increase, 810,000 infuriated customers\u00a0canceled 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\u2014an 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.<\/p>\n<p>During the first year after the price increase, the firm&#8217;s stock price (a measure of future expectations for the firm) fell from about $300 per share to just under $54. By June 2013, the stock price had rebounded to about $200 per share\u2014still off by more than one-third from its high, but definitely\u00a0improving. What happened? Obviously, Netflix\u00a0understood the law of demand. Company officials reported, when they announced the price increase, that this could result in the loss of about 600,000 existing subscribers. Using the elasticity of demand formula, it is easy to see that they expected an inelastic response:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone\" style=\"display: block; margin: auto;\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/342\/2016\/07\/19174624\/autogen-svg2png-001111.png\" alt=\"Worked example of the elasticity of demand formula. Calculations are as follows. -600,000 divided by the sum of 24 million plus 24.6 million divided by 2. This number should then be divided by the following: $6 divided by the sum of $10 plus $16 divided by 2. This yields 0.05.\" width=\"255\" height=\"109\" \/><\/p>\n<p>In addition, Netflix officials had expected\u00a0that 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 that this was slower growth than the firm had experienced over the past year\u2014about 2 million per quarter. Why was the estimate of customers leaving so far off? During the fourteen years after\u00a0Netflix was\u00a0founded, 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.<\/p>\n<p>Jaime Weinman reported in <span class=\"emphasis\"><em>Maclean&#8217;s<\/em><\/span> that Redbox kiosks are &#8220;a five-minute drive or 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.&#8221; 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&#8217; preferences and tastes. Yet, as the population increases, the preference for streaming video may overtake physical DVD disks. Netflix, the target\u00a0of numerous late-night talk-show jabs and laughs in 2011, may yet have the last laugh.<\/p>\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-5961\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Putting It Together: Elasticity. <strong>Authored by<\/strong>: Steven Greenlaw and Lumen Learning. <strong>Provided by<\/strong>: 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>\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":19,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Putting It Together: Elasticity\",\"author\":\"Steven Greenlaw and Lumen Learning\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"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-5961","chapter","type-chapter","status-publish","hentry"],"part":5918,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/5961","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/wp\/v2\/users\/18"}],"version-history":[{"count":1,"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/5961\/revisions"}],"predecessor-version":[{"id":5964,"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/5961\/revisions\/5964"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/parts\/5918"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/5961\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/wp\/v2\/media?parent=5961"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/pressbooks\/v2\/chapter-type?post=5961"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/wp\/v2\/contributor?post=5961"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/wp-json\/wp\/v2\/license?post=5961"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}