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Gramag Truck Interior Systems - Analyzing a Tax Increase
David R. Bailey
Department of Computer Science, Tiffin University
ECO222_201 Principles of Microeconomics
Sue Reser
November 13, 2022
2
Gramag produces seat systems for the heavy truck industry that focus on minimizing pressure points, noise, and vibration of the seat while maximizing lateral stability. This contributes to less driver fatigue which leads to greater levels of safety. A tax increase on these seat systems would not influence the quantity or price of this product in the short term. This is a result of Gramag being contractually obligated to a specified price for each unit and responsive to the needs of the heavy truck manufacturer for demand. Over time Gramag would have the ability to renegotiate their contract and pass along some of the cost caused by the new tax to the buyer. But in the short term, demand for seats is inelastic and therefore the incidence of the tax falls mainly to the seller, Gramag. Because of this, profitability will decrease as the seller shoulders all the burden of the increase. Gramag’s understanding of this volatility drives them to prepare for it in advance.
When we take a closer look, demand does not fluctuate in response to the change in tax. Demand is driven by orders from the manufacturer whose demand is driven by the shortage in OTR (over-the-road) trucking capacity in the economy, an increase in online shopping which increases products delivered to the home, and a looming emissions standard mandate taking effect in 2024. Consumers of heavy trucks are replacing their fleets before the new standards take effect. As we shift our consideration of a tax increase on goods produced to analyzing the impact of an increase on an input Gramag uses, things don’t change that much. A good example of this kind of change is the recent imposition of a tariff on steel. Steel is a large component in the products Gramag produces. As tariffs are levied the price of steel rises and supply decreases.
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