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Service Tax Hike: Elasticity of Demand and Incidence of Tax

CASE FLYER, MANAGERIAL ECONOMICS
ET Cases, 5 pages

Case Preview

Service Tax Hike: Elasticity of Demand and Incidence of Tax

 

Expected Learning Outcomes

• The concepts of Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand
• The impact of the Incidence of the Imposed Service Tax on various kinds of services – Luxury Services, Basic Services and Financial Services
• The concepts of Derived Demand and Autonomous Demand

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I. Impact on Luxury Goods and Services

1. Can you give a few examples of luxury goods and the factors influencing in buying them?
2. Do you buy luxury goods? If yes, what are the influencing factors? If no, why not?
3. Of the following three, which one do you think would have the most significant impact on your buying decision for a luxury good?

  • a. Price of luxury good/brand being considered
  • b. Your income level
  • c. Prices of other luxurious brands in the same category

4. ............................

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Teaching Note Preview

Service Tax Hike: Elasticity of Demand and Incidence of Tax

 

Synopsis

The base article1, presents three tables which outline the impact of the recently increased service tax on various services – luxurious services, basic services and financial services – and points out that there is an increase in cost of these services. However, the change in tax structure would influence the demand and supply curves of the services listed in the three tables. This case flyer introduces the participants/students to the concepts of Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand and the Incidence of the Imposed Service Tax.

Prerequisite Conceptual Understanding (PCU)/Before the Classroom Discussion

The participants should be asked to read the following chapter to help them connect the concepts discussed in the case flyer.

  • • Paul A. Samuelson, et al., “Supply and Demand: Elasticity and Applications”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the various types of elasticity and the impact of imposed tax i.e., Incidence of Tax

 

Case Positioning and Setting

The case flyer can be used in MBA or Executive MBA or Executive Development Programs, for the following modules/topics:

  • • Elasticity of Demand and Applications – To understand the various types of elasticity and the incidence of tax

 

Preamble to the Case flyer Analysis and Suggested Orchestration

This case flyer is meant to introduce the participants to the three types of elasticity – Price, Income and Cross – along with the sub-types thereof. While elasticity as a concept is helpful in several decisions, especially in pricing-related decisions, it is also helpful in gauging the possible response when a tax is levied. This case flyer, with the help of The Economic Times’ article that estimates on how three services get affected as a result of additional/revised service tax, was used to illustrate the operation of three types of elasticity. The classroom discussion was carried out as presented in Exhibit (TN)-I........

 



1 “Service Tax Hike to Have Marginal Effect On Household Expenses”, The Economic Times, June 3rd 2015, page 13


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Product code: ME-4-0012, ME-4-0012A

Abstract


This case flyer introduces the participants/students to three types of Elasticity - Price, Income and Cross Elasticity - along with Incidence of Taxation. The base article1 from The Economic Times estimates how the newly imposed service tax of 14% would impact three different types of services - Luxuries, Basic Services and Financial Services. This case flyer lets the participants to understand how different types of services behave differently to changes in prices, income and the prices of related goods (complements and substitutes). When a service tax is imposed the burden has to be borne either by the consumer (by way of increased prices) or the producer (by way of reduced margins) and this case flyer can be used to understand the accompanying incidence of taxation when a service tax is levied.



Pedagogical Objectives

  • To understand the three types of elasticity - Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand - in the case of three types of services - Luxuries, Basic Services and Financial Services
  • To examine the impact of incidence of tax when a service is levied based on the respective elasticity of the services
  • To understand the concepts of derived demand and autonomous demand and how the three types of elasticity play out

Case Positioning and Setting
The case flyer can be used in MBA or Executive MBA or Executive Development Programs, for the following module/topic:

  • Elasticity of Demand and Applications - To understand the various kinds of elasticity and the incidence of tax


1"Service Tax Hike to Have Marginal Effect On Household Expenses", The Economic Times, June 3rd 2015, page 13



This Case Pack Includes:
- Abstract
- Case Flyer
- Teaching Note (**ONLY for Academicians)
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