Sometimes the lack of economic literacy creates real problems. For example, Cory Matthews has five theories why Netflix raised their prices:
This week Netflix announced changes in their pricing plans, charging $16 a month for unlimited streaming and one DVD at a time, up from 10 bucks. When you consider that Netflix originally cost $21.99/a month, that's not so bad. And if you consider you have access to everything that was ever recorded on film, that seems like a fair deal. Nevertheless, the masses were enraged. So let's try and figure out where that money is going to. ...1. To Fix the Nation's Budget...The country needs some cash. Fast. How are they gonna do that, you ask? Job creation? Oh, I'm sorry I didn't realize you were [stupid]. Obviously, we all already have jobs - where else are we sitting around streaming reruns of Newsradio and Woody Allen movies that aren't Annie Hall? So maybe Netflix is in cahoots with the government and this is step one to fixing our nation. Look, there are roughly 25 million Netflix subscribers. Let me crunch some numbers here - excuse me while I take out my abacus - that's $1.8 Billion we can put toward the economy.
via www.funnyordie.com (note: profanity alert)
Ignoring the fact that any tax increase is DOA, holding all else constant, I would predict that the number of Netflix consumers will fall off 25 million as the price rises. Let's be generous and assume that demand is as inelastic as short term petrol demand (i.e., e = 0.10) so that a 60% price increase will reduce the number of customers by 6%. With only 23.5 million customers remaining the increased revenue is still substantial, but it is $108 million lower than forecast. Given that Netflix has more substitutes than petrol, my guess is that the forecast revenue could be much lower.
It is forecasting mistakes like this that can really cause serious problems.
