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Products, Services, And Prices In The Free Market Economy

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Running head: PRODUCTS, SERVICES, AND PRICES IN THE FREE MARKET ECONOMY

Products, Services, and Prices in the Free Market Economy

Matthew Anderson

Robert Cauldwell

Artavia Parrish

University of Phoenix

MBA 501

Forces Influencing Business in the 21st Century

M. Somerset DePoint

March 31st, 2008

Products, Services, and Prices in the Free Market Economy

Introduction

The Coca-Cola Company is one of the leading producers of sodas in the world. One of the staples of the Coke brand is the 16 ounce bottled Coke sold in supermarkets, gas stations, and vending machines all across the United States. The average price of 16 ounce bottled cokes nationwide is somewhere between one dollar and two dollars, so what determines price increases or decreases for this product from the Coca-Cola bottling company. What if a 10% increase or decrease is considered in price or even better what if the average income of the consumer increases by an average of 10%? To determine whether Coca-Cola (Coke) should raise or lower prices based on the elasticity of demand (McConnell and Brue, p.362), or whether or not small price changes can affect consumer demand or the elasticity of supply (McConnell and Brue, p.362), or if producers or suppliers price changes affect product prices, the factors that affect both of these concepts must be considered. Finally, to answer whether or not a consumer income increase can affect product prices the income elasticity of demand (McConnell and Brue, p.362), or how consumers change their buying demands as their income goes up or down, also has to be assessed. Once these concepts have been assessed a decision can be made whether or not to raise or lower Coke’s prices and if the consumer income affects this decision process.

Price Elasticity if Demand

The “price elasticity of demand is a measure of buyers’ sensitivity to price changes” (Cengage Learning, 1999). A product is elastic when the demand rises or lowers dramatically with an increase or decrease in price. A product is inelastic when demand shifts very little with an increase or decrease in price. With that said the price elasticity for Coca-Cola is rather high and the prices are that way with most soda brands. The reason that the price elasticity is so high on soda brands is the fact that they are a luxury and more there are a strong levels of competition between bottlers.

Coca-Cola could hardly be compared with other necessity beverages and would thus be considered a luxury item. Examples of necessity beverages would include water, juice, milk, formula, and others. When income is low people quickly give up on items that aren’t of necessity. If the point is made that Coca-Cola is a luxury beverage then elasticity increases. “The more that a good is considered to be a luxury rather than a necessity, the greater is the price elasticity of demand” (McConnell and Brue, p.362).

The other reason the elasticity of Coca-Cola would be high is because of “substitutability.” The text states, “generally the larger the number of substitute goods that are available, the greater the price elasticity of demand” (McConnell and Brue, p.362). Coca-Cola is the world’s leading producer of soda with a market share of 53% in 2006 (New York Times, 2007), but there are so many different types of colas and sodas in the market. If Coca-Cola makes a price increase, a consumer could easily make a switch to another brand. It is the substitutability factor that locks Coca-Cola to a price in a market that is fiercely competitive with other brands. If their price was not competitive the demand for Coca-Cola would slip and another competitor would take its place as the leader.

Price Elasticity of Supply

The Coca Cola Company is the world’s largest manufacturer, distributor, and marketer of non-alcoholic beverage concentrates and syrups. Coca Cola sells concentrated forms of its beverages to bottlers, which produce, package, and sell the finished products to retailers (Hinton, McPhillip, 2008). McConnell and Brue tell us that “The degree of price elasticity of Supply depends on how easily-therefore quickly-producers can shift resources between alternative uses. The easier and more rapidly producers can shift resources between alternative uses, the greater the elasticity of supply” (McConnell and Brue, p.364). Coca Cola has a variety of selections to offer its consumers outside of the famous “coke.” Coca Cola produces over 400 brands of non-alcoholic beverages, including carbonated and non-carbonated beverages, such as ready-to-drink juices, coffee drinks, tea and bottled water. Of these over 400 brands, there exist more than 2,600 different varieties (Hinton, McPhillip, 2008)

“If producers are relatively responsive to price changes, supply is elastic. If they are relatively insensitive to price changes, supply is inelastic (McConnell and Brue, p. 364). The Coca-Cola Company’s pricing flexibility has been diminished in recent years. Many of the food retailers that sell Coca-Cola products are consolidating, which gives them more power to bargain for lower prices (Hinton , McPhillip, 2008). In addition, the emergence of Wal-Mart as one of the world’s largest food retailers stands to harm Coca-Cola’s branded beverages due to Wal-Mart’s emphasis on private label brands (Hinton, McPhillip, 2008.) Also, the competitive nature of the non-alcoholic beverage market limits pricing flexibility. It’s crucial for Coca-Cola to maintain the balance between price growth and volume growth, or it could risk losing market share to competitors (Hinton, McPhillip, 2008).

Income Elasticity

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