The law of demand and supply works in opposite ways in the sense that, when the prices of commodities change, demand and supply also change in opposite direction holding other factors constant. The extent of adjustment of supply and demand is dependent on the type of the commodity in question. For instance, the demand or supply of some commodities responds more than changes in price as compared to other commodities.
This introduces the concept of elasticity of goods. The magnitude of the effect of change in price on the commodity depends on the price elasticity of the commodity. This paper reviews the price elasticity of commodities from Exxon and Coca-Cola companies. Specifically, the price elasticity or inelasticity will be discussed concerning how gasoline and carbonated beverage products react to changes in prices. Besides, the paper explores other issues of the two companies that influence the elasticity or inelasticity of their products.
Elastic product: Coca-Cola drink
Various determinants of supply and demand often change. For instance, the price of products can rise or fall, the cost of production will increase and the price of the substitutes or complementary commodities will also change. According to Mishra (2008), “it can be argued that goods that account for a large proportion of disposable income tend to be elastic. This is due to consumers being more aware of small changes in price of expensive goods compared to small changes in the price of inexpensive goods” (Mishra 8).
In this case, carbonated beverages such as those stocked by Coca-Cola are elastic. These products have an elastic supply since their prices determine their ease to be purchased in the market. Besides, when the demand for the same fall, the supply will respond almost instantly in the market. Consider an event in which the price of a Coca-Cola soft drink increases. The demand for the same will decrease by the same magnitude triggering the supply to decrease in the long run. On the other hand, the reduction in the price of the carbonated drink will influence the demand to increase as more customers will prefer the product (Mankiw 32).
Inelastic product: Exxon gasoline
Inelastic products are those that are not affected by the demand or supply. An example of an inelastic product is gasoline, which is one of the major products sold by Exxon. Irrespective of the price, consumers will continue using gasoline products since they don’t have substitutes. Besides, its use depends on consumer preference rather than market forces (Mankiw 13). For instance, an increase in the price of gasoline will not make car owners or manufacturers reduce their consumption of the product.
The general result is that demand for gasoline products of Exxon is price inelastic, holding other factors constant. As pointed out earlier, the demand for gasoline products stays strong despite high prices in the market. This would imply that the demand for gasoline products is perfectly inelastic; the price elasticity would be zero. The demand curve will take a vertical shape and the supply curve will take an upward sloping curve (Sexton 18).
Other issues affecting price elasticity/inelasticity
Degree of necessity
The degree of necessity depends on the nature of a product meant for a household. Reflectively, products that are basic and necessary in the daily lives of a household will not affect the demand curve very much despite the increase in the price of such a product. The household has no option but to continue consuming or using the product as it is basic. For instance, gasoline is a necessity that people must continue using, irrespective of the price charged for it.
Therefore, an increase in the price of gasoline will not lower the demand for the product. Besides, a small price change will not lead to a greater change in quantity demanded. This is because its use is not dependent on the demand and supply factors, but its necessity. On the other hand, carbonated drinks are considered a luxury and the households can do without them when the prices are considered too high. Therefore, an increase in the price of such a product will lower the demand (Sexton 20). A small change in price leads to a greater change in quantity demanded as customers will opt to wait and do the purchasing when prices are lower since the product is but a luxury in the product market as opposed to necessities.
Number of Substitutes
When there are more substitutes besides a product, the chances of shifting to these substitutes are higher. Therefore, the availability of a substitute may lead to a decrease in demand when the price for a product increases. When the price increases, the household might opt for the best alternative especially when doing the same will positively affect savings or add value to the disposable income. Therefore, several available substitutes in the case of Exxon will not make the demand curve to be responsive to changes in price since the consumer behavior will remain the same.
In the case of the carbonated drinks stocked by Coca-Cola, several available substitutes will make the demand curve to be highly elastic as responsiveness to changes in the price of the same attracts immediate change in customer behavior such as purchasing pattern. A small change in price in elastic carbonated beverages leads to a greater change in quantity demanded as customers will opt for substitutes that have a cheaper price tag or are more affordable in long run (McEachern 23).
Social and political issues
In the case of the Exxon Company, the prices of gasoline are closely controlled by the social and political climate of the crude oil market. Since these factors are similar to all players in the gasoline industry, customers have no alternative but to operate within the set prices. On the other hand, the Coca-Cola Company must struggle to set the most competitive prices since industry players operate in different social and political environments. With the availability of many substitutes that vary in prices, customers will find it easy to buy the alternative to Coca-Cola products that have the most competitive price tag.
Mishra, Rajan. Industrial Economics and Management Principles. New York, NY: Firewall Media, 2008. Print.
Sexton, Roberts. Exploring Economics. Alabama, Al: Cengage Learning, 2015. Print.
McEachern, William. Economics: A Contemporary Introduction. Alabama, Al: Cengage Learning, 2011. Print.
Mankiw, Gregory. Principles of Economics, Volume 1. Alabama, Al: Cengage Learning, 2008. Print.