![]() In Topic 3 we discussed how goods can be inferior/normal or substitutes/complements.A Fixed Cost is independent of output and its dollar amount remains constant irrespective of a company’s production volume. This means it can be applied to more that just the price-quantity relationship of our market model. ![]() Remember, elasticity is the responsiveness of one variable to changes in another variable. This reinforces the conclusion that mid-point represents an average. Our formula for elasticity, \frac, the only difference is that point-slope is the inverse of the slope multiplied by a single point, whereas mid-point is the inverse of the slope multiplied by multiple points. This shows the responsiveness of quantity supplied to a change in price. The own price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. This shows the responsiveness of the quantity demanded to a change in price. The own price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. We would say that the tennis ball has greater elasticity.īut how is this degree of responsiveness seen in our models? Both the demand and supply curve show the relationship between price and quantity, and elasticity can improve our understanding of this relationship. Which will bounce higher? Obviously, the tennis ball. The first item is a tennis ball, and the second item is a brick. Suppose you drop two items from a second-floor balcony. Elasticity is an economics concept that measures the responsiveness of one variable to changes in another variable. ![]() To find answers to these questions, we need to understand the concept of elasticity. The question is: How much higher? This topic will explain how to answer these questions and why they are critically important in the real world. Similarly, the law of supply shows that a higher price will lead to a higher quantity supplied. What you may not know is how much lower the quantity demanded will be. How did customers of the 18-year-old firm react? Did they abandon Netflix? How much will this price change affect the demand for Netflix’s products? The answers to those questions will be explored in this chapter with a concept economists call elasticity.Ĭlick to read the rest of the Netflix storyĪnyone who has studied economics knows the law of demand: a higher price will lead to a lower quantity demanded. The company also changed its policy of 4K streaming content from $9.00 to $12.00 per month that year. In 2014, Netflix also raised its streaming video subscription price from $7.99 to $8.99 per month for new U.S. Customers wishing to retain both streaming video and DVD rental would be charged $15.98 per month – a price increase of about 60%. In July 2011, the company announced a packaging change. In early 2011, Netflix consumers paid about $10 a month for a package consisting of streaming video and DVD rentals. Sound absurd? Well, that is the situation Netflix customers found themselves in 2011 – a 60% price hike to retain the same service. If you want both, you now face an extra charge of $1. If you want to pay your usual $3 for a cup of coffee, you must choose between creamer and sweetener. Instead of $3 for a cup of coffee with cream and sweetener, you will now be charged $2 for a black coffee, $1 for creamer, and $1 for your choice of sweetener. Imagine going to your favorite coffee shop and having the waiter inform you the pricing has changed. (Credit: Melo McC/ Flickr/ CC BY-NC-ND 2.0) That Will Be How Much? ![]()
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