Price Elasticity of Demand: Coca Cola Company
Price Elasticity of demand measures the change in the quantity demanded in response to a change in market price of the commodity. The same is measured by following formula:
Price Elasticity of Demand= % Change in Quantity Demanded/ % Change in Price
In context of Coca Cola company, the price elasticity of demand can be described as change in quantity demanded of Coca Cola when the company changes the price of the soft drink at which it is offered to the consumers. For instance, if Coca Cola increases the price of 300 ml Bottle from $1 to $2, then it is obvious that the consumers will decrease their quantity demanded following the decision of the company to increase the price.
Thus, Price Elasticity of Demand= % Change in Quantity Demanded/ % Change in Price
= (15-5/15)*100/(4-2/2)*100
=1.2
- If a small % change in price results in a larger percentage change in quantity demanded, the demand for that good is said to be highly elastic. For instance, when price elasticity turns out to be greater than 1, in such case demand is said to elastic.
- If a larger percentage price change results in a small percentage change in quantity demanded, demand is relatively inelastic. For instance, if price elasticity is less than one, it means that demand for the good is inelastic.
Thus, refering to above calculation we can figure out that demand for coca cola is elastic since the price elasticity factor is greater than 1.
Demand and Supply Analysis:
Both demand and supply are sole integral part of Price Mechanism. Whilst demand refers to different quantities which all the consumers are able and willing to buy at different possible prices at a given point of time, supply at the same time refers to different possible quantities which the suppliers in the market are able and willing to supply at different possible prices. Thus for Coca Cola, the management fix the price when both demand and supply comes intersects/ reaches equilibrium.
Supply
Demand
However, apart from price there are other factors that affect both demand and supply of the Coca Cola and are discussed below:
Factors affecting demand of Coca Cola:
a) Price of Substitute Goods:
Since Pepsi is the nearest substitute of Coca Cola Brand, any fall or rise in price of Pepsi will have an impact on demand of Coca Cola. For instance, if price of 300 ml bottle of Pepsi is reduced by 40 cents, then Coca Cola will face decrease in demand which graphically will be indicated by backward shift in demand curve.
Quantity
Income of Consumers:
With Coca Cola being a normal good any fall in income of the consumer will have a negative effect on demand of the good and vice versa. This will also cause shift in demand curve .
Factors affecting Supply:
Prices of Inputs:
Since sugar and other flavoring agents are an integral part of Coca Cola manufacturing, any substantial increase in their prices will have a negative effect on their supply and vice versa.
Effect of Government Regulation:
Any regulation from government will have probable effect on supply of the commodity. For Instance, if government raises taxes on soft drinks and the statutory burden is to be borne by suppliers, in such case, the price of Coca Cola will rise as suppliers in order to offset the tax effect will shift the burden on the consumers and ultimately will increase the price levels and will offer lower quantity in the market.
Supply+ Tax on Sellers
Supply
Works Cited
Jain, T. (2008). Elasticity of Demand. In T. Jain, MicroEconomics (pp. 22-34). New Delhi: Sharma.
Parkin, M. (2011). Elasticity. In C. Institute, Economics (pp. 8-22). Boston: Custom.
Parkin, M. (2011). Markets in Action. In C. Institute, Economics (pp. 48-62). Boston: Custom.
