ECON1008 Principles Of Economics

Question:

Task Description

Read Adam Turner’s article, “Netflix slugs Aussies With Price Rise and GST Tax Hike”, published in Sydney Morning Herald 28 June 2017.

The article asks you to answer three questions using economic models, if needed.

Explain and illustrate, using a demand-and-supply model, why Australians will be required to “pay upto 20% more” for online streaming.

You can analyse the price elasticity of demand determinants to determine if the demand for streaming in Australia will be price elastic.

Q2 (b).

Use an appropriate economic model as a basis for your conclusion.

Q3.

Answer:

This article discusses the new 10% GST on Netflix services, which has resulted in a rise of the cost of Netflix plans.

Netflix has increased the cost of its plans to help with new content.

Netflix has seen an increase in prices due to both the GST tax hike and Netflix’s own price rise.

The price of the basic plan goes up from $1 to $9.99 per monthly, while Ultra HD plans for four users go up $3 to $17.99

The demand-supply relationship can help us understand the price rise.

The tax adds costs to the firm so that the supply declines.

This is seen as an upward shift in supply curve S1 to S2.

We begin with equilibrium at E1 when demand equals stock- at this point, D1 intersects the S1.

A tax is levied to create a new equilibrium at E2, where S2 intersects with D1.

This results in a price increase fromP1 towards P2, and a decrease in quantity from Q1 through Q2.

This tax is not the only reason Netflix has increased its price.

“The introductions of new content, and features by Netflix makes it justifiable to raise the price of Australia’s digital taxes.”

The movement of the supply curve can show this higher price.

Netflix moves from E1 – B. the article doesn’t explain how B and E2 connect.

Both of these events cause prices to rise, but it’s not possible to say how much is tax-related and how much Netflix contributed.

There are many variables that influence price elasticity and demand.

The number of alternatives to the good increases elasticity.

Elasticity can be affected by the quality of the product – luxury goods are elastic, while necessities goods are inelastic.

Here, time is a factor.

Consumers have the ability to adjust to changes over time, which makes elasticity more flexible.

These factors indicate that Netflix has inelastic demand.

This is due to Netflix’s own price increases, plus the tax increase.

The timing of its price rise does not indicate that it is worried about falling consumer demand.

It is reasonable confident in negotiating the price hike with consumers.

Netflix can also avoid transparently revealing what portion of the tax has been pushed towards the consumer – the timing of price increases is chosen to increase tax burden.

If we assume that demand is elastic, it is likely that Netflix will raise prices to increase its revenue.

This is because, in economic theory, when demand is low, a rise in prices causes revenues to increase.

As follows:

Change in TR/change of price = dTR/dP = D(PQ)/dP =Q + P(dQ/dP).

= Q +Q*(PdQ/dP*Q).

Q( 1- lEl), where E is the absolute demand elasticity value E.

E = 1 (inelastic demand) means that a price rise will also cause an increase in Netflix revenues.

Each party is responsible for the tax’s incidence.

This sharing is affected by the supply and demand elasticity.

The economic agent with lower price elasticity will have a greater share of the tax burden.

If the price elasticity of demand is greater than the price elasticity, then the seller will have to bear more than the buyer.

If the price elasticity of supply is greater than the price elasticity of demand, then the burden of tax will fall on the consumer.

In the diagram, the tax = P3 + P1

Consumer burden/incidence =P2-P1.

Netflix Incidence/Burden = P3 – P2

Netflix’s elastic demand can lead to consumers bearing a higher tax burden than Netflix.

Also, we can show that Netflix has a more elastic demand.

Below is a blue demand line which is elastic-flatter than DD.

The price rise is much lower as illustrated by the blue vertical lines.

This blue line represents the consumer incidence. It’s much lower than the red (with elastic demand like Netflix).

Netflix has an inelastic market, so we will only be focusing on the red line.

Consumer welfare suffers from price increases.

As a red shaded region, the loss of consumer surplus can be seen.

The seller/producer gains if the price is higher.

However, quantity can also be a benefit.

Both are represented in shaded areas of different colours.

The total difference in surplus and deficit is shown in green.

When a tax becomes a tax, society suffers from a loss of efficiency.

References

Shifts of demand and supply

Deadweightloss and taxation.

Principles of Economics. Mankiw N.G.

In markets, welfare.

Relationship between price elasticity and total revenue.

Sexton R.L., n.d. Welfare and Marker Efficiency.

In Exploring Economics.

Leave a Reply

Your email address will not be published.