Taxes are among the tools that governments use to influence the market. For example, recently, the Trump administration recently announced sweeping tax reforms. The aim of these reforms is to reduce the tax burden that corporations shoulder and thereby establish conditions that enable these firms to operate efficiently. In addition to shaping organizational operations, tax policies also affect the quantity of goods that a company can bring to the market. The case of Harley-Davidson serves as an illustration of this impact of taxes.
Immediate Impact of Tax Cuts on Supply and Demand Curves
The price of a commodity is the main factor that determines the level of supply and demand for that particular commodity. Therefore, in order to determine the effect that the tax cuts will have on the supply and demand curves of the Harley-Davidson plant, it is necessary to consider the impact of the rates on price. Tax cuts reduce the cost of doing business (Bellafiore, 2019). This means that since they are paying lower taxes, firms can invest greater amounts into the production process. Consequently, the supply of their products increases significantly. This is registered on the supply curve which shifts as will be described in the following section. The tax cuts will also impact the demand of the products by Harley-Davidson. Usually, tax cuts prompt firms to pass on this benefit to their customers in the form of lower commodity prices. The law of demand states that lower prices boost demand (Arnold, 2008). Furthermore, it is stated in the case study that the tax cuts have also been extended to consumers. The implication of this is that consumers now have higher disposable income which translates to increased demand. Therefore, with the lower prices, Harley-Davidson will witness a dramatic increase in the demand for its commodities.
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Direction of Shift
As stated above, the demand and supply curves of the Harley-Davidson plant will reflect the impact of the tax cuts. The increase in supply will cause the supply curve to shift to the right. This shift will reflect the fact that the company’s supply has increased. On the other hand, the demand curve will witness a downward movement. This movement will show that as a result of the tax cut, the demand for the products that the company sells has increased. As the supply curve shifts and there is movement along the demand curve, a new equilibrium price will be established. An illustration of this shift and movement and impact on the equilibrium price is offered in a later section.
Impact of Shift on Equilibrium Price and Quantity
Above, it has been stated that the supply curve shift and movement along the demand curves of Harley-Davidson will have a noticeable effect on the equilibrium price. As shown in the image below, the supply curve shifts from position S to position S1. This shift is accompanied by a downward movement along the demand curve. The shift of the supply curve and the movement along the demand curve causes a new intersection at point E1. This point is the new equilibrium. Corresponding to this point is P which serves as the new price that Harley-Davidson should charge for its products. Furthermore, the intersection means that the company will also need to change its production output. Point Q1 marks the equilibrium product quantity that the firm should bring to the market. It is important to note that the illustration represents the situation that any firm that has received a tax cut will witness. Unless other factors are at play, the tax cuts should yield similar outcomes for any other company.
References
Arnold, R. A. (2008). Economics. Boston: Cengage.
Bellafiore, R. (2019). Amortizing research and development expenses under the Tax Cuts and Job Act. Tax Foundation. Retrieved August 8, 2019 from https://taxfoundation.org/research-development-expensing-tcja/
