Activity 4.2 - Analyzing a Tax Increase

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1 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.

3 Supply is inelastic and it takes time for domestic capacity to meet demand. In the meantime, companies must continue to import steel, absorbing the price increase. Profitability decreases because Gramag is unable to affect change in the price charged or the supply required. At a later time, they will be able to renegotiate the pricing structure but in the interim, they must adapt to the change, increase efficiency to mitigate the damage and rely on reserves to weather the increase. Gramag’s business model expects these types of fluctuations and is structured to be flexible and resilient during such periods. This is one of their advantages in the market. It’s also why forecasting, planning, and remaining responsive to the market is so vital in this industry.

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4 References Gramag. (2022). About. Https://www.gramag.com/about/ Mankiw, N.G. (2021). Principles of Microeconomics. Engage Learning.

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