News Article on Netflix Services
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Added on 2020-03-28
News Article on Netflix Services
Added on 2020-03-28
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Answer 1This news article talks on the new 10% GST levied on Netflix services which has led to a rise in theprice of Netflix plans. There has also been a hike in price of its plans by Netflix, to support theintroduction of new content. The combined effect of tax hike due to GST and Netflix’s own pricehike is an increase in the price of Netflix services. This rise ranges from $1 to $9.99 per month forthe basic plan, while the four-user Ultra HD plan rises $3 to $17.99.The rise in price can be seen through the prism of demand- supply analysis. A tax has the effect ofadding to costs of the firm, so that supply decreases. This is shown as an upward shift of the supplycurve from S1 to S2. We start with equilibrium at E1 where demand equals supply- D1 intersects S1at this point. As a tax is levied new equilibrium is found at E2, where S2 intersects D1. This leads torise in price fromP1 to P2, while quantity falls from Q1 to Q2.Along with this tax, we also have Netflix increasing its own price. ‘Adding a price rise on top ofAustralia's digital tax is justified by Netflix's introduction of new content and features’. This higherprice can be seen with a movement along the supply curve as shown below. Netflix moves from E1to B. the article does not mention how B and E2 are connected. Both events cause price to rise but itcannot be said how much rise is due to tax and how much has Netflix contributed to it.
Answer 2:a.There are many determinants of price elasticity of demand:Elasticity is higher when there are greater number of substitutes for the good. The nature of the good affects elasticity- luxury goods have an elastic demand, while anecessity good has an inelastic demand. Time plays a role here. In the long run, consumers get time to adjust to changed situations,making elasticity more elastic.Based on these factors it seems that Netflix enjoys inelastic demand. This is because it has increasedprices on its own, on top of price rise due to new tax. The timing of the own price rise shows that itis not relay worried about falling demand. it is reasonably confident of getting the price risethrough with consumers. This also saves Netflix from transparently showing what share of the taxhas been pushed to the consumer- the timing of price rise is chosen to push tax burden onconsumer. b.If we believe that demand is inelastic then it is clear that Netflix will get more revenues byraising prices. This is because in economic theory a rise in price causes revenues to rise whendemand is inelastic. We can show this as follows:Change in TR/ change in price = dTR/dP = d(PQ)/dP = Q + P(dQ/dP)
= Q + Q*(PdQ/dP*Q) Q( 1 – lEl ) where E is the absolute value of demand elasticity E. When E < 1 ( inelastic demand) then a rise in price will cause a similar rise in revenues for Netflix. Answer 3The incidence of any tax is shared between the seller and consumer. This sharing depends on therelative strength of demand and supply elasticity. The share of tax burden falls more on theeconomic agent who has lower price elasticity. If the price elasticity of demand is higher than priceelasticity of supply then the seller will bear a greater burden than the consumer. If the priceelasticity of supply is higher than price elasticity of demand then the consumer will bear themajority of the tax burden. [ CITATION NGr \m Rob \l 1033 ]In the diagram the tax = P3 – P1 Consumer burden/ incidence = P2-P1 Netflix burden/ incidence = P3-P2Since Netflix has an inelastic demand we can expect consumers to bear a greater burden of the taxthan Netflix burden. We can also show that with a amore elastic demand , the burden would fall more on the Netflix. thisis seen below with a blue demand curve which is more elastic- flatter than DD. It is seen that the
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