Since nobody took up the elasticity challenge (see below) on their own, we solved it in class today. The original post says that “when Netflix raised its price from $10 to $16, it lost 1 million of its 25 million subscribers”. We googled the formula for price elasticity of demand:
E = % change in quantity / % change in price
And figured out that according to the midpoint formula, a “% change” is calculated as:
% change = [value 2 – value 1] / average of the two values
Keeping in mind that for price elasticity, we drop the negative sign, we calculated the price elasticity of demand to be:
[(25-24)/24.5] / [(10-16)/13] = .088
Since the coefficient of elasticity is less than 1, demand is inelastic, or not responsive to a change in price. This means that increasing the price was, in fact, a very good business decision, as it caused total revenue (Quantity x Price) to increase from $250 million to $384 million.
Somebody at Netflix remembered their microeconomics…