Economic Analysis: Netflix Price Increase, GST, and Elasticity

This assignment analyzes the economic implications of Netflix's price increase, considering the impact of a new 10% GST and Netflix's own price adjustments. It employs supply and demand analysis to illustrate how the tax shifts the supply curve, leading to a new equilibrium with a higher price and lower quantity demanded. The assignment explores the concept of price elasticity of demand, suggesting that Netflix likely enjoys inelastic demand, allowing it to raise prices without significantly impacting revenue. Furthermore, it discusses tax incidence, highlighting that consumers bear a greater burden of the tax due to inelastic demand. The analysis includes diagrams to visualize consumer and producer surplus, deadweight loss, and the overall welfare implications of the tax and price changes. The conclusion emphasizes the welfare losses for consumers and the inefficiency introduced by the tax.

Answer 1
This news article talks on the new 10% GST levied on Netflix services which has led to a rise in the
price of Netflix plans. There has also been a hike in price of its plans by Netflix, to support the
introduction of new content. The combined effect of tax hike due to GST and Netflix’s own price
hike is an increase in the price of Netflix services. This rise ranges from $1 to $9.99 per month for
the 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 of
adding to costs of the firm, so that supply decreases. This is shown as an upward shift of the supply
curve from S1 to S2. We start with equilibrium at E1 where demand equals supply- D1 intersects S1
at this point. As a tax is levied new equilibrium is found at E2, where S2 intersects D1. This leads to
rise 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 of
Australia's digital tax is justified by Netflix's introduction of new content and features’. This higher
price can be seen with a movement along the supply curve as shown below. Netflix moves from E1
to B. the article does not mention how B and E2 are connected. Both events cause price to rise but it
cannot 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 a
necessity 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 increased
prices on its own, on top of price rise due to new tax. The timing of the own price rise shows that it
is not relay worried about falling demand. it is reasonably confident of getting the price rise
through with consumers. This also saves Netflix from transparently showing what share of the tax
has been pushed to the consumer- the timing of price rise is chosen to push tax burden on
consumer.
b. If we believe that demand is inelastic then it is clear that Netflix will get more revenues by
raising prices. This is because in economic theory a rise in price causes revenues to rise when
demand 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 3
The incidence of any tax is shared between the seller and consumer. This sharing depends on the
relative strength of demand and supply elasticity. The share of tax burden falls more on the
economic agent who has lower price elasticity. If the price elasticity of demand is higher than price
elasticity of supply then the seller will bear a greater burden than the consumer. If the price
elasticity of supply is higher than price elasticity of demand then the consumer will bear the
majority of the tax burden. (Mankiw, n.d.; Sexton, n.d.)
In the diagram the tax = P3 – P1
Consumer burden/ incidence = P2-P1
Netflix burden/ incidence = P3-P2
Since Netflix has an inelastic demand we can expect consumers to bear a greater burden of the tax
than Netflix burden.
We can also show that with a amore elastic demand , the burden would fall more on the Netflix. this
is seen below with a blue demand curve which is more elastic- flatter than DD. It is seen that the

price rise in much lower, as shown with blue vertical line. This blue line is the consumer incidence,
which is much lesser than the red line( with inelastic demand like for Netflix)
Since Netflix has an inelastic demand we focus on the red vertical line only. The price rise
causes welfare losses for consumers, as price is higher now. The loss of consumer surplus is
shown as red shaded area. as price is higher there is a gain for seller/producer. but as quantity
is lower there is some gain as well. Both are shown as shaded areas in different colours. The
total change in both surplus is negative, and is called the deadweight loss, shown in green .
Whenever a tax is levied it leads to a deadweight loss- society is less efficient when a tax is
levied. (Aure, 2012)6

Anon., n.d. Shifts in demand and supply. [Online] Available at:
https://cnx.org/contents/ETAPPz5d@5/Shifts-in-Demand-and-Supply-fo [Accessed 19 Sep 2017].
Aure, M.L., 2012. Deadweightloss and taxation. NTRC Tax reserach journal, XXIV(6), Available at:
http://www.ntrc.gov.ph/images/journal/j20121112a.pdf.
Economics.utoronto.ca, n.d. Elasticity, TR and MR. [Online] Available at:
https://www.economics.utoronto.ca/jfloyd/modules/eltr.html [Accessed 20 Sep 2017].
economicsonline.co.uk, n.d. Price elasticity of demand. [Online] Available at:
http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html
[Accessed 18 SEp 2017].
Mankiw, N.G., n.d. Principles of Economics. In markets and welfare. 6th ed. Cengagebrain.com.
pp.160-62.
Setiyadi, D., n.d. Relationship between price elasticity and total revenue. [Online] Available at:
http://www.academia.edu/7378448/The_Relationship_Between_Price_Elasticity_of_Demand_and_
Total_Revenue [Accessed 18 Sep 2017].
Sexton, R.L., n.d. Marker Efficiency and Welfare. In Exploring Economics. 7th ed. Cengage. pp.197-
99.