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Chapter 6: Problem 5

One study found that the price elasticity of demand for soda is -0.78 , while the price elasticity of demand for Coca-Cola is \(-1.22 .\) Coca-Cola is a type of soda, so why isn't its price elasticity the same as the price elasticity for soda as a product?

Short Answer

Expert verified
The price elasticity for Coca-Cola is different from that for soda generally due to the greater availability of substitutes for soda and the specificity of Coca-Cola as a unique product. As Coca-Cola is a specific brand with distinct taste and fewer substitutes, a change in its price significantly affects its demand, making it more elastic compared to the inelastic demand for soda in general.

Step by step solution

01

Understand Price Elasticity of Demand

The price elasticity of demand measures the percentage change in quantity demanded for a percentage change in price. The elasticity of a specific brand of a product is usually different from the elasticity of the overall product market. This is due to elements like brand loyalty, availability of substitutes, and nature of goods (whether they are considered a luxury or a necessity).
02

Comparing Elasticities

Now we'll compare the given elasticities. An elasticity of -0.78 for soda means that if the price of soda increases by 1%, the demand for soda decreases by 0.78%. An elasticity of -1.22 for Coca-Cola means that if the price of Coca-Cola increases by 1%, the demand for Coca-Cola decreases by 1.22%. We can see that the demand for Coca-Cola is more responsive to price changes than the demand for soda in general.
03

Understand Substitutes and Specificity

When it comes to a generic product like soda, there are many substitutes available. If one type of soda becomes too expensive, consumers can easily switch to another. However, for a specific brand like Coca-Cola, substitutes are less readily available, especially if consumers prefer Coca-Cola's unique taste. Consequently, if the price of Coca-Cola increases, consumers might be more likely to switch to a less expensive soda, and that's why the price elasticity of demand for Coca-Cola is greater than that of soda in general.
04

Interpreting the Differences

The differences in elasticity can be interpreted as a measure of brand strength or how much a product is differentiated. Coca-Cola, as a more differentiated product with greater brand loyalty, is more susceptible to price changes (elastic), whereas soda, as a general category with ample substitutes, is less affected by price changes (inelastic).

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Most popular questions from this chapter

(Related to the Apply the Concept on page 203) An article in the Wall Street Journal notes that although U.S. oil production has increased rapidly in recent years, the increase has still amounted to only 5 percent of world production. Still, that increase has been "enough to help trigger a price collapse." Briefly explain under what circumstances a small increase in supply can lead to a large decline in equilibrium price.

A study of the consumption of beverages in Mexico found that "overall, for soft drinks a \(10 \%\) price increase decreases the quantity consumed by \(10.6 \%\)." Given this information, calculate the price elasticity of demand for soda in Mexico. Is demand price elastic or price inelastic? Briefly explain. Source: M. A. Colchero, et al. "Price Elasticity of the Demand for Sugar Sweetened Beverages and Soft Drinks in Mexico," Economics and Human Biology," Vol. 19, December 2015, pp. \(129-137\).

What is the midpoint formula for calculating price elasticity of demand? How else can you calculate the price elasticity of demand? What is the advantage of using the midpoint formula?

Economists' estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent." Given this information, compute the range of the price elasticity of demand for cigarettes. Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain.

Draw a graph of a perfectly inelastic demand curve. Think of a product that would have a perfectly inelastic demand curve. Explain why demand for this product would be perfectly inelastic.
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