ECON 1006 Microeconomics

Introduction

Turner (2017) is trying to show how an increase in the cost of producing a good or a service influences the price charged on that good or the service provided. The increase on cost is as a result of the introduction of Netflix GST tax. The Australian customers are expected to pay a price that is 20% higher than what they used to pay earlier. This may have an impact on the supply and demand of Netflix products. One expectation is that the high price will discourage consumption. The suppliers will be hurt and depending on the price elasticity of demand for Netflix products will shift the burden of the increased tax on the consumers. If the products confirm to be price elastic, the suppliers will not be able to shift much of the tax incidence to the consumers; though the consumer price will rise, the suppliers will also carry a significant proportion of the tax burden. On the other hand, if the products are confirmed to be inelastic to changes in price, the suppliers will be able to shift the biggest proportion of the increased tax burden to its consumers and carry an insignificant proportion; or they can shift the whole tax burden.

Question 1

The article emphasizes on price increased after the GST tax introduction on Netflix. This will disrupt the equilibrium that preexisted on the demand and supply for Netflix products. The demand is expected to fall as the customer’s willingness to purchase these Netflix products will fall. In economics, demand laws dictates that consumers demand more when the products are offered at a lower price, but demands less of a similar product when it is offered at a higher price (Goodwin et al., 2015). An expensive product will thus attract less number of customers. The supply for the Netflix products is affected by costs of production whereas the demand is affected by price changes. The graph below will be used to illustrate the changes on the demand, supply and price for Netflix products after GST tax introduction. Cost of production is one of the non-price factors influencing the supply for Netflix products.

Fig: Demand and supply for Netflix products after GST tax introduction

The equilibrium point before the Netflix GST tax introduction is at the intersection of supply and demand curve above at quantity is Qe and price Pe. The GST is an addition to the cost of providing the Netflix goods and thus is affecting the supply for the goods. According to Chand (2016), any other factor other than price that affects supply causes the supply curve to shift; the addition to the cost is lowering the supply and thus a shift of supply curve S0 to S1 indicated by the arrows. The demand curve is influenced by price and any price influence on demand causes a movement along its curve; any other factor causes it to shift (Dorman, 2014). The shift in supply along the demand curve is creating a new equilibrium at the intersection of demand curve and supply S1. The new equilibrium quantity is Qt at price Pt. 

Question 2a

There is a high elasticity of demand for a good with many close substitutes; less substitutes makes demand to e inelastic. If the good is not that necessary, consumers demand less when its price is hiked making it more elastic; necessity goods are inelastic. The duration of price change also determines elasticity; if the consumers are able to find a substitute in the short run, the good is more elastic (Riley, 2015); if not possible, the good is inelastic. An elastic demand is where demand changes by a big proportion when price changes, and inelastic when it changes with a lower proportion. Given the conditions above it can be concluded that Netflix products are elastic to price changes. Battersby (2017) also gave an important notion to support this conclusion when she said that the Australian willingness to pay for online streaming is falling.

Question 2b

The demand curve for an elastic demand is flatter than when inelastic (McEachern, 2012).

Fig: How the Elastic nature of Netflix products affect its total revenues

the graph on elastic PED for Netflix products shows that a small increase in price (P0 to P1) is resulting in a big fall in quantity demanded (Q0 to Q1) (Mankiw, 2016). The total revenue for Netflix will be lowered for selling quantity Q1 at price P1. The revenue is larger when selling quantity Q0 at price Q1.

Question 3

A unit tax is imposed on the produced units and one of the consequences is that the cost of production rises. The suppliers (Netflix) will bear the greatest burden of tax since the PED for their products is elastic (Beggs, 2016). They will not be able to shift the tax burden to the consumers.

Fig: Tax incidence with both elastic demand and supply curves.

The tax will shift S0 to S1 increasing production cost for Netflix. The tax rate is PtPs. Pt is the after tax price whereas Pe is the pretax price. Tax rate payable by consumers is PePt and the amount is equal to area Pt, a, b, Pe and tax rate payable by consumers is PsPe and the amount is equal to area Pe,b,d,Ps. The tax rate for Netflix is higher and thus carries the biggest burden. The producer and consumer surplus will fall and there will be a deadweight loss area acd; the deadweight loss represents a loss of efficiency in the Netflix market after the policy imposition. Producer surplus falls by Pe,Ps,d,c and consumer surplus by Pt,Pe,c,a

Conclusion

The introduction of GST tax on Netflix will increase its cost of production, raise the prices and quantity demanded and supplied will fall. The biggest tax incidence will be borne by Netflix because of the elastic nature of its products. Consumers will avoid demanding the products at the high price and thus total revenue for Netflix will fall.

References

Battersby, L. (2017). Australians trust traditional news, but still won't pay for it online: Deloitte. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/media-and-marketing/australians-trust-traditional-news-but-still-wont-pay-for-it-online-deloitte-20170813-gxv2gs.html [Accessed 7 Sep. 2017].

Beggs, J. (2016). The Relationship between Elasticity and Tax Incidence. [Online] ThoughtCo. Available at: https://www.thoughtco.com/elasticity-and-tax-incidence-1147952 [Accessed 8 Sep. 2017].

Chand, S. (2016). Effect on Supply Curve due to Changes in Other Factors | Economics. [Online] YourArticleLibrary.com: The Next Generation Library. Available at: https://www.yourarticlelibrary.com/economics/effect-on-supply-curve-due-to-changes-in-other-factors-economics/9112/ [Accessed 7 Sep. 2017].

Dorman, P. (2014). Macroeconomics: A fresh start. Heidelberg: Springer.

Goodwin, N., Harris, J., Nelson, J., Roach, B. and Torras, M. (2015). Macroeconomics in context. USA: Routledge.

Mankiw, G. (2016). Principles of microeconomics. Australia: Cengage Learning.

McEachern, A. (2012). Economics: A contemporary introduction. Mason, OH: South-Western Cengage Learning.

Riley, G. (2015). Factors Affecting Price Elasticity of Demand. [Online] tutor2u. Available at: https://www.tutor2u.net/economics/reference/factors-affecting-price-elasticity-of-demand [Accessed 8 Sep. 2017].

Turner, A. (2017). Netflix slugs Aussies with price rise alongside GST tax hike. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/technology/gadgets-on-the-go/netflix-slugs-aussies-with-price-rise-alongside-gst-tax-hike-20170627-gwzw9j [Accessed 7 Sep. 2017].