Demand Analysis

Demand Analysis

The term ‘demand curve’ is used to describe the quantity of an item that will be in demand due to the customers’ will to buy and the ability to buy the item over a specific time period priced at a specific rate (Hildenbrand, 1983). In general, the depiction can be described as the relation (inverse) that exists between the demand and the price.

Figure: Demand Curve
(Source: Learner)

As stated in the above figure, the product demand falls as its price increases, and its demand significantly increases as the price falls. The demand Q1 at price P1 (high) is lower than demand Q2 at price P2 (low).

Factors affecting demand

• Relative goods price

Coca Cola demand is affected by the shifts in the prices of similar items.

Figure: Classification of relative goods
(Source: Learner)

There are various items that can be regarded as the substitute of Coca Cola, some of the common ones in the market, including Pepsi, Limca, Red Bull, and many more. Now, in case the Coca Cola price increases by 20 cents while the other aerated drink prices are intact, the Coca Cola demand will come down.

• Customer income

No direct relationship exists between demand and customer income. However, Coca Cola being a popular item may be in more demand if the income of the consumer increases.

• Taste

The preferences and taste vary from customer to customer and is a significant influence on product demand (Higgins et. al., 1995). There are groups of consumers who have a strong preference for specific beverages. The demand for Coca Cola among such consumers who prefer its taste will always be high even if the price rises. If the consumers are indifferent, the demand will be impacted by the increase in price.

• Supply

The profit of the supplier also has a significant impact as an increase in price will influence the supplier to increase supply quantity for more profit (Gale, 1955). Some of the significant factors influencing the supply of Coca Cola include its price, state of technology used, count of consumers (more consumers require more supply), and the input price of the supplier.

• Other factors

Other factors that can influence the demand of Coca Cola in the market include government regulations, time of the year, and population age.

Shifts in the demand curve

Changes in demand for a product due to factor variations are defined by the demand shift curve. An upward shift in demand is defined by the upward shift curve where the demand increased at a constant price due to any of the changes mentioned above, while a downward demand shift curve states the decrease in demand at a constant price due to changes in external factors.

Demand Elasticity

Demand Elasticity is defined as the rate of change in quantity as per the changes in price.

In case the price is elastic, a small variation in its price would induce a significant variation in demand.

Figure: Elasticity Curve for Coca Cola
(Source: Dhar et. al., 2005)

From the above figure, it can be stated that the demand Q at price p changed the demand Q’ with an increase in price to p’. The demand for Coca Cola is elastic, and the elasticity is more than 1 (Dhar et. al., 2005). The various determinants for demand elasticity of Coca Cola include:

• Substitute availability: The market has ample varieties of aerated drinks, thus offering natural substitutes of Coca Cola in case the price increases.
• Time: For a short period of time, the demand for Coca Cola is inelastic due to specific preference, time period, and other factors. However, the taste is sure to change in the long run, making the demand elastic.
• Income level: Most of the consumers of Coca Cola belong to the middle group of income and changes in price makes its demand elastic to them.

Since the nature of Coca Cola is elastic, slight changes to its price can trigger significant shifts in its demand, keeping the availability of its substitutes in mind.

Reference

Gale, D. (1955). The law of supply and demand. Mathematica scandinavica, 155-169.

Hildenbrand, W. (1983). On the” Law of Demand”. Econometrica: Journal of the Econometric Society, 997-1019.

Dhar, T., Chavas, J. P., Cotterill, R. W., & Gould, B. W. (2005). An Econometric Analysis of Brand‐Level Strategic Pricing Between Coca‐Cola Company and PepsiCo. Journal of Economics & Management Strategy, 14(4), 905-931.

Higgins, R. S., Kaplan, D. P., McDonald, M. J., & Tollison, R. D. (1995). Residual demand analysis of the carbonated soft drink industry. Empirica, 22(2), 115-126.