Boost+to+demand+if+luxury+tax+is+reduced+by+Venus

//**REMEMBER: DO NOT SUMMARIZE THE ARTICLE!!!**//


 * TITLE OF EXTRACT**: Boost to demand if luxury tax is reduced


 * SOURCE:** Shanghai Daily (www.shanghaidaily.com/article/?id=494382)


 * DATE EXTRACT WAS WRITTEN:** 15 February 2012


 * DATE CURRENT EVENT WAS WRITTEN:** 23 February 2012

Three economic theories can be applied – the law of demand, elasticity, and indirect tax. Firstly, the law of demand states that as the price of a product falls, the quantity demanded of the product will usually increase. Secondly, the concept of elasticity shows that as a luxury product is elastic, a change in the price of the product leads to a greater than proportionate change in the quantity demanded of it. Thirdly, when an indirect tax is imposed on an elastic product, the consumers would unlikely spend money to buy the good because it’s not necessity.
 * EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:**


 * VOCABULARY TERMS AND DEFINITIONS:**
 * Demand – The quantity of a good or service that consumers are willing and able to purchase.
 * Tax – Imposed upon expenditure by the government on workers’ income and business profits, or added to the cost of goods and services.
 * Revenue - The income that a company receives from selling its goods and services.


 * DIAGRAMS:**

Graph 1 shows the imposition of a specific tax on a luxury product, while graph 2 shows the change in producer revenue before and after tax is imposed. Cathy Li, chief executive of the Hengdeli Group Ltd, said that reducing tax on luxury goods “will create a great demand”. As shown in Graph 1, the demand curve is slightly horizontal. This is because a luxury good is elastic; therefore the burden of any tax imposed will be greater on the producers of the product than on the consumers. Furthermore, Graph 2 shows that before tax is reduced, the producers’ revenue changes from the part shaded in orange and green to the part shaded in green. In order to maintain their original revenue, the producers would raise the price to P2 in order to pass on all of the cost of the tax to the consumers. However, at the price P2, consumers would not be willing to spend money to buy the expensive good. Before tax is reduced, only Qe is demanded. However, when tax is reduced, the demand changes from Qe to Q1, proving Cathy Li’s statement correct. This shows that in order to increase demand, tax on imported luxury products should be reduced.
 * EVALUATION:**

Blink, Jocelyn, and Ian Dorton. //Economics Course Companion//. Oxford: Oxford University Press, 2011. Print.
 * CITATION:**