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Price elasticity of demand is the measure of responsiveness of the quantity demanded in relation to changes in price of a certain commodity. It can be calculated as follows:

PED = % change in quantity demanded / % change in price

Netflix is a company dealing with movie renting and streaming services, it is involved in the internet television network where the members pay a subscription to the company in order to receive DVD and streaming services. The price elasticity of demand of this company is inelastic, this is because a small change in price leads to infinite change in demand e.g. when prices increase from $9.99 a month to $15.98 there is a reduction of demand of up to one million customers, this shows that the price elasticity is  inelastic.

PED = (-1000000/25000000) X 100/ (5.99/9.99)X100)

         = 4/60

        = -0.07

There are several factors that determine the price elasticity for Netflix, these factors include the existence of substitutes, whereby there are other companies which provide similar services at a cheaper price, and also customers, who are switching to cheaper plans; e.g. customers are now switching from three DVD at a time to two DVD. There is a habit and a fashion, where people will try changing their habits and fashioning when prices of the commodities increases. Finally, the proportion of income spent on the commodity also determines the price elasticity of a product: if the proportion of income is constant, the consumer tends to look for cheaper products once the price of a certain commodity increases.

Although the company did not lose any revenue since the increase of prices compensated the loss of customers, the increase of prices was not a good idea because the company lost customers whom they inconvenienced. Also, the increase of the prices damaged the reputation of the company which led to decrease in its share price in the stock market.

Since Netflix increased its prices, it has not fared well because the company has cut out almost 1 million customers due to increase in prices. Secondly, their share price in New York reduced by 28%. Lastly, the company was forced to abandon their plans to separate DVD and internet streaming because their plans of separating their services angered the customer.

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