Coca-Cola Demand Elasticity and Externalities

The assignment discusses the demand elasticity of Coca-Cola, considering how price changes affect revenue. It also examines potential externalities, including pollution from plastic waste and negative health effects due to high sugar content. The analysis provides insights into the market dynamics and environmental impacts of the beverage industry.

20212021
Microeconomics: Product Report

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1. Choose a Product and a Trend
Before you begin, choose a product to study. Specifically, make sure to choose a product that is a
consumer good. Keep in mind that goods are tangible products. For example, soft drinks,
clothing, cars, and electronics are all types of consumer goods.
Product: Coca-Cola
A soft drink, like Coca-Cola carbonated beverage refers to a non-alcoholic beverage which
usually consists of liquid, a sweetener, as well as a flavoring agent (Wang, 2008)
For the product you’ve chosen, consider economic trends (real or hypothetical) that might impact
this product. You should come up with at least two: one for supply and one for demand. Some
examples that you may use:
 A change in preferences due to a fashion or health trend
 A shift in demographics due to aging populations
 An increase or decrease in the input costs (such as cost of raw materials or labor) needed
to offer a product
Note: Although research is not required for this step, it is encouraged. See the Supporting
Materials section of this project for some recommended databases.
Trend 1:
Factor that affect demand for Coca-Cola is:
A change in consumer tastes or preferences
Customer preferences may shift because of many of factors, like consumer demographic age,
social patterns, seasonal trends and economic volatility. Will an individual purchase a
commodity if it is deemed desirable? Consumers are attracted by effective ads as well as
positioning. Coca-Cola has a strong market equity and a strong personal connection with its
customers. Coca-Cola motto is "Open Pleasure," has effectively established the company as a
worldwide symbol of joy. These connections are critical in persuading a customer to purchase
a product.

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The health issues also cause to change consumer preferences as Consumers are
concerned regarding the ingredients of Coca-Cola because they become more aware
about health-related problems like increased blood pressure, overweight, as well as diabetes
(Andersson et al., 2006).
Trend 2:
Factor that affect supply of Coca-Cola
Advanced technology
Automation has contributed to a reduction in production costs. Suppliers can supply more at a
lower cost as a result of process optimization techniques (Beggs, 2019). Coca-Cola actually
raised a capability of its bottling plants by implementing Siemens technology. Which means
that the plants' capacity has improved dramatically, lowering production costs. Means that any
advancement in Coca- Cola's production technique processes lowers the manufacturing costs,
allowing suppliers to supply more goods
Please note that, while this section is not checked for mastery, it is needed as the basis for the
rest of your project.
2. Determinants of Supply and Demand
For each economic trend you consider, describe it according to the determinants of supply and
demand. Use the determinants from the following list:
 Demand: Income, prices of related products, preferences, demographic characteristics,
buyer expectations
 Supply: Prices of factors of production, technology, returns from alternative activities,
the number of sellers, seller expectations, natural events
Demand determinant:
Changes in consumer preferences
Demand is influenced by the product's taste as well as preference that affects a buyer's decision
to select Coca-Cola over other consumer products. If a customer enjoys a flavor of Coca cola,
he or she would choose to prefer the same commodity over others as even the price of Coca-

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Cola rises. But at the other side, If a customer dislikes the flavor of Coke, he or
she is likely to turn to another brand (Paracha et al., 2012).
Supply determinant:
Advanced technology
Technology advancement does indeed have a direct impact on supply because Coke is made
from advanced modern technology, manufacturers can now supply more goods at a same
price. The population of consumers: When the consumer population grows, so does the
quantity of supplied goods rises
Input prices: As production prices fall, such as labor expenses, shipping costs, as well as raw
material costs, the price falls, allowing producers to supply more goods.
3. Model a Shift
Using one of the trends that you’ve described above, model the shift in supply or demand for this
product. Make sure to use appropriate labels and terminology in your model.
Note: To model the shift in supply or demand graphically, you may use the drawing tools in
Microsoft Word, or use the graphing tool linked in the Deliverables section and take a
screenshot. Alternatively, you may describe the shifts that will occur.

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Demand determinant:
Shift in demand: Changes in consumer preferences
P
Price of So
Coca-Cola
P1 E1
Eo
Po
P2 E2 D1
D2 Do
0 Q
Q2 Qo Q1
Quantity demanded of Coca-Cola
Supply determinant:
Advanced technology
P So
Price of Coca-Cola S1
Eo
Po
E1
P1
Do
Qo Q1 Q
Quantity supplied of Coca-Cola

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4. Rationale
Explain your rationale for this shift (based on the model above) using appropriate economics
terminology. As you work, consider the following:
 The difference between a shift in supply or demand versus a shift in the quantity supplied
or demanded
 How the equilibrium will shift
Demand determinant:
Changes in consumer preferences
Upward shift:
A shift in demand implies that the quantity demanded would be different at every price as
compared to previous one. Taste as well as preferences have an impact on shifts in demand
curve. A favorable shift in consumer preferences for Coca-Cola would result in a rise in the
quantity demanded of a good for each price (Po to P1), and thus a shift in the product's demand
curve to the right by Do to D1. This may be due to the fact that customers enjoy the flavour of
Coca-Cola, as well as in the past few years, a zero-sugar brand was added to the market, which
has tended to boost demand for Coca-Cola. As a result the equilibrium price where quantity
demanded and supplied are equal shift from Eo to E1.
It can be shown that at a given price OPo, consumers buying OQ quantity of Coca-Cola with
demand curve Do, as well as with a rightward shift in the demand curve to D1, they demand
larger quantity OQ1 of Coca-Cola with demand curve D1.
Downward shift:
Unfavorable shifts in customers' preferences for Coca-Cola as a result of health issues such as
obesity, disease, as well as unfavorable taste, from the other side, would result in a decline in
demand for drink, causing a shift to the left in a demand curve by Do to D2. Consumers would
demand less quantity of the commodity with a lower demand curve D2 at each price than it
used to be. As a result, customers will demand OQ2 quantity of the commodity that is less than
OQ at price OP2 with demand curve D2.
Supply determinant:
Advanced technology

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Fluctuations like technical advancements can trigger a change in supply from So
to S1, which influences an equilibrium state. As technology advances, the cost of
manufacturing decreases, resulting in greater competitiveness and reliability in the
manufacturing of carbonated drinks, as well as an improvement in revenue. This causes a rise
in Coca-Cola supply, shifting the supply curve to the right.
An outward shift in supply curve raises the amount of supply present within a market for each
price, as well as for a defined demand curve, the market equilibrium price drops by Po to P1 as
well as the amount of production purchased as well as sold rises by Qo to Q1. An extension of
the demand curve is caused by a shift in supply curve.
5. Elasticity
The firm is also interested in understanding the elasticity of price for this product within the
market. Consider a rise in the price of this product and determine if demand is elastic or inelastic
based on an application of the determinants of price elasticity of demand.
For each of the determinants in the following list, consider the impact on the elasticity of demand
for the product:
 Availability of substitutes
 Time
 Importance in household budgets
 Luxury or necessity (such as addictions or habits)
 Availability of substitutes
Substitutes for Coca-Cola are easily and quickly accessible on the market. Many aerated
beverages are now available on the market. Pepsi, Mirinda and so forth are its close
alternatives. When price of Coca-Cola increases, the consumers will shift towards its close
substitutes and would start buying other soft drinks i.e. Pepsi, Mirinda. As a result, the demand
of Coca-Cola decreases substantially. Thus, Coca-Cola goods have an elastic demand because
the availability of close substitutes makes the consumers sensitive to price changes for Coca-

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Cola. It makes the demand for Coca-Cola elastic. Cola-Cola have high possibility
of substitutes i.e. Pepsi, mirinda. Thus, its price elasticity of demand is higher.
It means that quantity demanded for them changes often as prices change which implies that
the small price change will result in a big change in demand that is due to the competitive
nature of the beverage market (Colchero et al., 2015)
Meanwhile, when Coca-Cola becomes conscious about its products' demand elasticity, it can
decide to decrease the costs of its beverage, reducing demand for Pepsi.
 Time
Coca-Cola demand appears inextricably linked to a time period. Summers and festivals saw an
increase in demand. As a result, demand elasticity changes with the duration of time span.
Demand elasticity is elastic in the long term (since long time period is sufficient for
individuals to change their tastes as well as preferences but in the short run, demand is
inelastic.
 Importance in household budgets
In case of elastic demand of Coca-Cola since households spend a good portion of their income
on purchasing drink, if price of Coca-Cola decreases, it implies that households can save from
their budget leading to rise the quantity demanded of Coca-Cola. Whereas, if price increases,
people cannot afford to buy as much quantity of the product as they buy earlier, so quantity
demanded falls (NICKOLAS, 2020).
 Luxury or necessity
Since Coca-Cola is a luxury drink, its price elasticity of demand is significantly greater.
6. Price Increase
The firm is considering how the price of this product might change its demand. Using your
determination on elasticity, explain how a price increase would impact revenue for this product.
Price changes have an impact on total revenue if demand is elastic, as it is for Coca-Cola
products. Whenever a price goes up, the revenue goes down. If Coca-Cola notices a drop in
revenue, they can sell goods at a discount in order to boost sales.

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7. Externalities
In addition to the trends and shifts, the company is also interested in understanding possible
ramifications of this product on the larger world. Discuss a potential externality of a transaction
for this product. It may be positive or negative. For example:
 Pollution from secondhand smoke or product waste
 Education as a result of product use
 Bacterial resistance due to overuse of antibiotics
 Widespread disease prevention due to vaccinations
Negative externality with Coca-Cola:
As Coca-Cola has replaced the glass bottles with plastic ones. The environmental impact of
plastic is not taken into account into the market: neither manufacturers nor customers are
responsible for emissions. Society as well as the world feel the consequences of the costs.
Plastic pollution accounts for:
Loss of biodiversity:
Adverse effect on biodiversity as a result of plastic poisoning or trapping species in the forest,
as society lose the environmental services such animals offer (Singh and Sharma, 2016).
Health issues
Contributes toward negative health effects on people and cause many disorders as soft drinks
contains high amount of sugar leading to overweight in kids and obesity in youngsters (Borges
et al., 2017). Moreover, it cause type two diabetes, heart disease and high blood pressure.
References
1. ANDERSSON, E.-L., ARVIDSSON, E. & LINDSTRÖM, C. 2006. Coca-Cola or Pepsi;
that is the Question: A study about different factors affecting consumer preferences.
2. BEGGS, J. 2019. The Determinants of Supply.
3. BORGES, M. C., LOUZADA, M. L., DE SÁ, T. H., LAVERTY, A. A., PARRA, D. C.,
GARZILLO, J. M. F., MONTEIRO, C. A. & MILLETT, C. 2017. Artificially sweetened
beverages and the response to the global obesity crisis. PLoS medicine, 14, e1002195.
4. COLCHERO, M. A., SALGADO, J., UNAR-MUNGUÍA, M., HERNANDEZ-AVILA,
M. & RIVERA-DOMMARCO, J. 2015. Price elasticity of the demand for sugar

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sweetened beverages and soft drinks in Mexico. Economics & Human
Biology, 19, 129-137.
5. NICKOLAS, S. 2020. Which Factors Are Important in Determining the Demand
Elasticity of a Good?
6. PARACHA, A. M. J., WAQAS, M., KHAN, A. R. & AHMAD, S. 2012. Consumer
Preference Coca Cola versus Pepsi-Cola. Global Journal of Management And Business
Research, 12.
7. SINGH, P. & SHARMA, V. 2016. Integrated plastic waste management: environmental
and improved health approaches. Procedia Environmental Sciences, 35, 692-700.
8. WANG, Y. 2008. Child obesity and health. International encyclopedia of public health.
Elsevier Inc.