Azureen Azlam

Don't mind me, just bundling up my assignments..

Thursday, 4 June 2015

Microeconomics Individual Assignment (Sem 1 - 2015)

1.0) INTRODUCTION TO ARTICLE SUMMARY

After the implementation of Goods and Service Tax (GST) in

Malaysia, The Star Online posted an article about the government listing

295 products that will be inexpensive following this implementation.

These products include 273 products (such as household items) that were

previously subjected to 10% of Sales and Service Tax (SST), have now

been subjected to only 6% of GST. 22 of the remaining products (like

salted fish, dried fish and imported fruits) that were subjected to 5% SST

have now been completely exempted from GST (0%). This article also

talks about the negative response of the nation after this new

implementation, despite it rendering these products inexpensive. This is

because the prices of the products were already expensive to begin with

as stated by Datuk Ahmad Maslan, Deputy Finance Minister, therefore

rendering the nation angry. How this effects the economy is it could cause

the consumers to bare a higher tax incidence. Not only that, the elasticity

of said goods also play a role in who (consumers or producers) will end up

baring this tax burden. Finally, when either one of the party bares a higher

tax burden, this could effect the consumer supply, producer supply and

could potentially create a deadweight loss in the market.

2.0) MICROECONOMIC CONCEPT TAX INCIDENCE

Due to the effects of the new GST implementation, tax incidence

is easily applicable in this situation as it is defined as the actual division of

the burden of the tax between consumers and producers in a market. This

would mean that when taxes have been imposed, only two outcomes

might arise: either the consumers bare the higher percentage of the tax

burden, or the producers bare the higher percentage of the tax burden.

How this can be determined is through the steepness of the demand or

supply curve. A steep demand curve would mean that the consumers are

less likely to be effected by the changes in price therefore, when the price

increases, they would be forced to bare the higher tax burden percentage.

If a demand curve is shallower, this would mean the consumers are likely

to be effected by the changes in price therefore, when the price increases,

there would not be forced to bare the higher tax burden percentage but

instead the producers will. The same reasoning applies to the supply

curve as well.

From what I gathered from this article, it is clear that this new GST

implementation is in the favour of the consumers as the government had

imposed cheaper taxes on 295 products. However, a statement made by

our Deputy Finance Minister said that the main issue with this new tax

implementation is not the implementation itself but the prices of the

products as they are still expensive. For example, 22 products out of the

295 are mentioned to be necessity goods therefore the demand is less

likely to change due to the changes in price and due to this new

implementation, these products have been completely exempted from

GST (0%). Datuk Ahmad Maslan said, We are faced with traders who are

still manipulating the prices, but this list (of 295 products) are facts. This

would imply that the producers are increasing the prices of these goods

knowing the demand will not or is less likely to change thus; consumers

would bare the higher percentage of the tax burden. Finally, as

stated in the article, this leaves the nation angry at the government for

the increment in prices of goods and also the tax they have to bare.

2.1) MICROECONOMIC CONCEPT ELASTICITY

Another microeconomic concept that is applicable to this article is

elasticity. There are 2 types of elasticity: elasticity of demand and supply

and this simply means the responsiveness of the demand or supply to the

changes in price. In other words, if a demand curve is elastic, slight

changes in price will cause a vast change in the quantities consumed by

the consumers. This usually happens to normal goods. If it is inelastic,

slight or even vast changes in prices will not cause a vast change in the

quantities consumed by the consumers. This applies respectively to

elasticity and inelasticity of supply as well.

 According to this article, Datuk Ahmad Maslan said, The prices of

majority of the products should be reduced, so GST will bring benefits to

the rakyat. The prices of cars have been reduced, why are the prices of

others have not declined? This proves that the 273 products out of 295,

which were mentioned to be goods such as cars and clothing, are elastic

to the changes in price. Besides that, as mentioned previously, 22

products are necessity goods therefore; they are less responsive to the

changes in price. Due to this, there is no doubt from the article that the

producers are charging said goods at a higher price because 1) they are

aware that the demand for these goods are less likely to change; and

even if they do, it is very little and 2) they do not want to bare the higher

percentage of tax incidence. This can be easily described using Diagram 1

and 2 below:

From this diagram, it is clearly displays the steepness of the demand

curve and the red arrow that shows the fall in quantity demanded (from
Q1 to Q2) is very minor despite the rise in price (from P1 to P2). This
shows the inelasticity of demand, which applies for necessity goods like
the 22 product mentioned.
 From this diagram, it is clearly displays the shallowness of the demand
curve and the red arrow that shows the rise in quantity demanded (from
Q1 to Q2) is vast due the fall in price (from P1 to P2). This shows the
elasticity of demand, which applies to normal goods like the 273 products
listed.

2.2) MICROECONOMIC CONCEPT CONSUMER

SURPLUS/PRODUCER SURPLUS & DEADWEIGHT LOSS

Finally, the third concept that is applicable is consumer surplus,

producer surplus and deadweight loss. According to AmosWeb.com,
consumer surplus is defined as the difference between the amount you
pay and are willing to pay. How this works is consumers gain satisfaction
from a good when the amount they are willing to pay is higher than the
amount they have to pay. As for producers surplus, it is defined as the
amount suppliers receive and are willing to accept. This basically means
the producers receive revenues (gain satisfaction) when the amount they
are willing to accept is higher than the amount they have to pay.
Futhermore, deadweight loss could happen when there is an imposition of
taxes where it disrupts the supply price and demand price thus creating
inefficiency in the market equilirium.

In the case of this article, there is a quote stated by Datuk Ahmad

Maslan saying that the GST will bring benefit to the nation if the prices

were reduced. This means that despite the implementation of GST that is

supposed to be in the favour of the consumers, the amount consumers

are willing to pay is still lower than the amount they are supposed to pay

as the prices of products have increased. This means that they have to

pay for products at a higher price and bare the new tax implementation.

In other words, the consumer surplus have decreased thus creating an

increase in producer surplus. As mentioned earlier, when there is a

disruption to what otherwise would have been a stable market equilibrium

with equal consumer and producer surplus, it now creates a deadweight

loss in the market. This deadweight loss means the increase in prices due

to the producers will cause a portion of both consumer and producer

surplus to be loss in the market. This can be further explained in Diagram

3 and 4 as follows:
 In this diagram, the area below the demand curve and above the price

equilibrium shows the consumer surplus and the area above the supply

curve and below the price equilibrium shows the producer surplus before

the tax implementation and price increment.

In this diagram, it shows the effects of the price increment and also the

new tax implementation. Previously, consumer surplus should have been

area A, C and D, but after these two incidences, consumer surplus is only
 left with area A. As for producer surplus, previously it would have been

area B and E, but now it has increased to area B and C. Area C and D are

now loss in the market as deadweight loss. They do not belong to the

consumer or producer surplus.

3.0) CONCLUSION

In conclusion, this new tax implementation will cause more

damage than good. These 3 economics concepts which are tax incidence,

elasticity and consumers surplus, producers surplus and deadweight loss

are proof of how destructive it can be if taxes are not implemented

properly. The nation of Malaysia is now angry with the government

because of the high prices of goods and the taxes they have to pay now

as mentioned by Datuk Ahmad Maslan in this article.

REFERENCES:

1. SparkNotes: Elasticity: Elasticity. 2015. SparkNotes: Elasticity:

Elasticity. [ONLINE] Available

at: http://www.sparknotes.com/economics/micro/elasticity/section1.r

html. [Accessed 04 June 2015].

2. AmosWEB is Economics: Encyclonomic WEB*pedia. 2015. AmosWEB

is Economics: Encyclonomic WEB*pedia. [ONLINE] Available
at: http://www.amosweb.com/cgi-bin/awb_nav.pl?
s=wpd&c=dsp&k=deadweight+loss. [Accessed 04 June 2015].

3. Hubbard, R.G. and OBrien, A.P. (2015) Economics. Fifth Edition.

United Kingdom: Pearson.

ARTICLE LINK:
 1. http://www.thestar.com.my/Business/Business-News/2015/05/12/GST-295-products-

should-be-cheaper/?style=biz

ARTICLE:

With GST, 295 products should be cheaper.

Tuesday, 12th May 2015

KUALA LUMPUR: The government on Tuesday listed 295 items that should be cheaper
following the implementation of Goods and Services Tax (GST).

The list compromises 22 products which was earlier subjected to the sales and service tax
(SST) of five per cent but now have been exempted from the GST, and 273 products which
were previously imposed with the SST of the 10 per cent but now subjected to the GST of six
per cent.
Deputy Finance Minister Datuk Ahmad Maslan said the rakyat should have felt the impact
from the reduction in product prices following the implementation of the GST.

"We are faced with a few traders who are still manipulating prices, but the list (of items) are
facts.
I have given the directive for traders to reduce the price. If they don't follow the order to
reduce prices as directed by the Finance Mistry and Royal Malaysian Customs Department
(RMCD), this means that they have violated the stipulated acts, among them, the Ministry of
Domestic Trade, Cooperatives and Consumerism's act," he told reporters after launching the
'Biasiswa Srikandi Malaysia' programme here, on Tuesday.

The list of items was given by the RMCD, he said.

Ahmad explained that traders must reduce the prices of 22 food products in the list
encompassing salted fish, dried fish and imported fruits, as they have changed status from
five per cent SST to goods that are exempted from the GST.

As for the 273 products that were previously subjected to 10 per cent SST, their tax should be
reduced from 10 per cent to six per cent.

Besides cars, the other products on the list include household items and basic necessities such
as furniture, clothing, sanitary pads, pampers, stationery, cordial drinks, car batteries and
tyres.

"The discipline that should be followed is 'minus five (SST) becomes 0 (GST-exempted),
minus 10 (SST) becomes six (GST)', before attaching the new prices," he said, while urging
the other traders to follow Mydin, Jakel and KFC in implementing GST.
"Those that have brand names normally follow the SOP (standard operating procedure), what
I'm worried are the shops in the villages," he said.

Ahmad said the rakyat is now angry at the government because of the high prices of goods
and they also had to pay taxes.

"The main issue with GST is product prices. If prices could be stabilised, the GST would no
longer be an issue.
The prices of majority of products should be reduced, so GST will bring benefits to the
rakyat. The prices of cars have been reduced, why are the prices of other products have not
declined?" he said.

For the services sector such as motorcycle workshops which imposed GST, Ahmad noted that
only companies with annual sales value of more than RM500,000 must register for GST.
"The small companies need not register. If consumers are in doubt, the status of shops can be
checked at the RMCD portal.", he said.

He said checks could be made at the portal: http://gst.customs.gov.my which provided links
to four other portals to get information related to the GST, namely
http://www.treasury.gov.my, http://www.kpdnkk.gov.my, http://gstpedia.my, and
http://gstmalaysiainfo.com.
On the price of prepaid reload coupon, Ahmad said the issue was still under review at the
related ministry and the telecommunication companies also give air time bonus accordingly
to consumers. - Bernama

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Azureen Azlam
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