Gas Prices Cause Rise in Consumer Spending

This blog article is based on the “Gas Prices Cause Rise in Consumer Spending” article by The Associated Press from The New York Times that was posted on September 28, 2012. The full article can be seen here.

In today’s economy, we are affected by the rising gas prices in everyone’s lives.  Natural gas is not a renewable resource, since there is a fixed amount of it trapped in the Earth. However, many people carry the misconception that there is a very limited amount of natural gas but actually this isn’t true. Gas price can be down a little one month, up the next month, and then it can shoot up highly in a sudden too. All these high costs of gas are actually caused mainly by the demand for natural gas.

The price of gas is widely covered in the news these days. The gas price rise consistently which causes the different spending methods for all consumers each time. Consumers have been spending lesser on their own requirements due to the gas prices rises. People always want more than what we can get and the inability to get certain things is known as scarcity. It is all about the choices of consumers making their decisions to deal with scarcity and how those choices respond to incentives. A hike in gas prices is always a major headache but it can also be a severe problem for many families or consumer budgets. Come what may, consumers are still paying money for gasoline even if the price keeps increasing radically. All of the consumers spending increase higher in order to pay for higher gas prices, which may have forced consumers to cut back elsewhere. In the other hand, some consumers might also give up on driving their own vehicles. Instead, they can also travel along with public transportation or car pooling as it can be a lot cheaper.

Based on the article, consumer spending rose 0.5 percent in August from July due to gas price rises. The basic cause heavy increase in gas prices is an imbalance between the supply of oil and the demand for gas. In today’s time, the prices of gas are somehow much cheaper than the price for oil. Therefore based on the consumer’s point of view, the opportunity cost will be other petroleum’s such as oil since gasoline is cheaper. The opportunity cost of purchasing gasoline is the oil we must forgo because we cannot purchase more of one good without giving up some other goods that provides greater benefits. We demand for something we want it and are able to afford it that is why we are demanding more from it. In this situation, Consumers are demanding for more gas instead of oil. This causes the price of gasoline increases dramatically due to consumers demand. If the demands from consumers are lower, the price of gasoline will also be lower as simple as because nobody wants it.

Today buyer’s demand competes for gasoline instead of supply competing for buyers. When a price rises, other things remain the same and a person’s salary did not increase, causes the income effect. People cannot afford to buy all things previously bought and they need to decrease the quantities demanded of some other goods and services. An example for gas is if the price of gasoline rises, people have to purchase other goods lesser in order to purchase the same amount of gasoline. In the other hand, if the price of gasoline decreases, people have a chance to spend their money on other goods or they can increase the usage of gasoline. In this case, substitution effect can be involved too. If the price of gasoline is too high, consumers have their right to substitute gas with other better fuels or public transportations. Although each good is exclusive, it has to be substitute with other goods that can be used in place.

If the expected future price of gasoline rises and if gasoline can be stored, the opportunity cost of obtaining the gasoline in the future use is lower today than it will be in the future when people expect the price to be higher and eventually people will keep substituting over time. They demand gasoline now before its price increases, so it affects the demand rate now for gasoline increases. Gas price often go up during the summer because more people will be traveling, especially on family vacations and road trips, thus it increases demand. For example, suppose that summer season it’s around the corner, the expected price of the gasoline is to rise, so people stored up some gasoline to avoid the high-priced. So, their demand for gasoline now has increased and their future demand has decreased. Same goes to when the expected future price of gasoline falls in the winter season in the future, the demands for now reduces and eventually increases while winter.

Of course, the populations demand also depends on the size and the age structure of the populations. The larger populations the larger is the demand for all gasoline whereas the smaller the populations that are requiring for the use of gasoline, the lesser demand is required. Consumers’ income influences strongly on demand. As mention in the article, Americans income grew only 0.1 percent but after accounting for inflation and deducting taxes, income actually fell 0.3 percent. When income increases, consumers are able to buy more goods such as gasoline but when income decrease, consumers couldn’t afford much. As when income increase, is when also one can afford to purchase more gasoline to travel with vehicles as a normal goods rather than traveling by public transportations as an inferior goods. 

            Besides demand, gasoline is also example of goods that have inelastic demand. Demand for gasoline is the quantity demanded by buyers doesn't change as much as the price does. Even though some consumers might not purchase that much gasoline when its price is high, but they still require buying it. This is when the quantity demanded doesn't change as much as the price because consumers still require using it. Lastly, proportion of income spent on the good is when other things remaining the same, the greater income spend on good; the more elastic is the demand for it, then again the lesser consumer’s income, the more inelastic is the demand for gasoline. These are all the causes and effects of American consumers spending methods while gas prices rose nearly 50 cents a gallon in July and August.

Less Sugar, More Money

 [The article is a respond to the article "Awang Adek: Subsidy reduction for sugar can

curb sugar smuggling" on The Star Online dated October 7th 2012. Full article can be 

found here. ]

Imagine our daily life without sugar; waking up to bitter coffee, tasteless bread and pastries. Isn’t that look like a bad start for the day? Every single continent regardless the countryside or central business district, every single person on the planet needs sugar. It keeps you going as it helps you with your sugar level in your body and without it, we will be less productive at our workplace. Have you ever heard of sugar rush? Yes turning into hyperactive that usually happens to kids. Hypothetically speaking, without sugar its pretty much drive the level of production of workers in any respective areas all over the world to extremely low rates and simultaneously affect the gross domestic product rates.  Even animals need sugar. If I have to name a few animals that need sugar it would be sugar glider and elephant. All right now lets move to the fact, sugar is the most heavily subsidized more than any other basic commodity in the world. 80 percent of the world’s government subsidizes it. Apparently our government now reduces the subsidy for sugar in Malaysia that fall under the category of normal goods. They believe that by reducing the subsidy will help in reducing the smuggling activity across the border between Kelantan and our neighboring country, Thailand. Now, we’re talking about the possibility of what might happened if government decided to stop subsidize normal goods such as sugar and in my opinion It could go both ways.

Smuggling may be the subject of sudden attention on sugar since in reality it is inelastic which means it is as nearly as impossible for us especially Malaysians to go throughout the day without having it. Imagine what would happen to Starbucks, Chatime, or any food outlet? And we can’t drink milk tea without sugar hence the idea of reducing the subsidy will never change the fact that it may cause problems since people  still need to have sugar as it is part of their necessities or normal goods. The only available substitute for sugar that is available on the shelf in the supermarket probably chemically engineered sweetener or honey. As for honey in some country consider being a luxury items like New Zealand (Known for its Manuka honey that can provide natural antibiotic) range between $30 to $45 New Zealand Dollar a bottle and that my friend, is not cheap at all.

                   In my opinion, I personally think that by cutting subsidy by 20 cent will not necessarily prevent smugglers from smuggling sugars from other country with lower prices. Worst-case scenario it may become the cause for more underground activity where the whole idea was the other way around. Even if the government can deter the problem, some supplier may eventually illegally hoarding sugar.

As the Law of demand stated that if a price of a good increase the quantity demanded will decrease, since the price of the sugar getting more expensive and the quantity demanded for sugar is decreasing in a way telling us “hey, look at the bright side we can live a healthier lifestyle from now on !”. Pressure can be a powerful motivation to curb our appetite unless someone going to start making their own sugar factory in their backyard. Perfect timing for the consumer to start slow down on their sugar consumptions since 3.4 million, which is equivalent to 14.9 percent out of 28,859,154 that recorded in 2011 are diabetic. It will benefit not only for their pocket but also their health. Imagine if the consumptions of sugar cut down, public and private health services provider and diabetic food supplier may have to diversify their businesses.

Shortage on supplies for sugar happens in Malaysia usually during festive seasons, and I believe that the supplier will put higher prices in order to balance out the demand for sugar and put pressure on the consumer to buy instead of going back home empty handed due to the scarcity.  So this is where the government must intervene by controlling the price of sugar so that every consumer if not all, most of them can afford to buy the goods. Not too low so the supplier can make money and not too high that consumer cant afford it for it will meet at the point of equilibrium. Another way of tackling this issue is by importing sugar from other country. Shortage of supplies will also affect country that importing sugar from Malaysia such as Singapore which importing 20 percent of the sweet thing.

   When the price of basic commodity fluctuating, companies involved in Food industry may take a beating and ineffective price management may risk the company’s success. For that reason necessary action need to be implement in the short run in order to maintain the survival of the company in the long run. Factories manufacturing all sorts of food product may have to cut down on expenses of production by cutting the salaries of the workers including higher rank of command in order to cope with the fluctuating price of the basic commodity. They also need to find substitute good in order to meet with the demand although it may put a hole in the safe since we need money to make money right? .

In order to achieve the success rate, every organization and responsible authority need to take action in handling this issue and not only by reducing subsidy because it will be a useless effort if only government take part in exterminate the illegal smuggling. What is the point of vacuuming a room during the storm with open windows? .

The Black Gold Conundrum

 

 [This article was based on  "California Struggles With High Gas Prices" by Clifford

Krauss for New York Times published on October 5th 2012, the article can be found here ] .

        

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Last week, the price of fuel for car in Southern California has increased 20 cents to  $4.54 and $5.00 overnight for some places around the region according to NBC news that resulted from several mishaps at California refineries. Apparently it has shown sign of decrease in quantity demanded and for some drivers had choose not to purchase the inelastic product by the consumer as a sign of retaliation of the sudden spike in fuel price. Different from what took place in our country where the government allocated RM 18 billion in maintaining the fuel price to RM 1.90 per liter although the actual price for RON95 is RM 3.18 worldwide. If the price of fuel will continue to increase, it will contribute to negative impact towards our daily life as a consumer.

Fortunately enough the government decided to subsidize the oil for the citizen to cope with ever increasing price of oil. Truths to be told the price of oil will never goes down unless George W. Bush found out there’s tones of oil underneath Canadian soil. Its good that the government trying to cut the oil price by either using tax money or importing cheaper, lower quality crude oil for the consumption of the citizen. So we now know not only consumer but also the government also implementing the substitution effect.

Believe it or not, our life depends on the black gold. It is almost as essential to us like water to our body. For us who lives in this beautiful country of Malaysia, fuel is almost perfectly inelastic. Quantity demand for fuel will probably lesser due to the income effect. This is because we are developing country with average income workers. That being said gives fewer alternatives as a substitution effect. Even for developed country with more companies like Toyota and Honda producing hybrid and electric generated cars, it is still less visible on the tarmac such as United States due to the price tag of those types of car. Other than walking, carpool with colleague, taking public transportations or installing NGV in the car probably the best three deals there are on the table as substitution effect considering not many people willing to walk under the blistering sun. It will also affect the price of grain since the farmers may have to increase the price in order to keep the engine running for the machineries. Normal goods such as rice and sugar would increase in price due to the increase in factors of production since oil is one of determining factor for price. Inevitably less people demand for normal goods that is the law of demand. Let me show you what law of demand in graph so you will understand it better;

 This will result in people searching for inferior goods that cost half the price of normal goods. In terms of nutrition, it may provide less but surely keep tummy full. So more people going to the hypermarket store like Giant and Tesco. The situation probably different to premier supermarket such as Cold Storage, Village Grocer, Harrods and the list goes on. Not to forget people will reduce their appetite for imported goods and shift to local made product and this will also help the local market grow bigger. If the government still wants the consumer to purchase the imported product, they may have to reduce the tariff on imported goods and more lenient on taking other goods from other country so it will keep the consumer coming to the premier store.

Over the years we have seen some Airlines Corporation closed down and recently Comair permanently by Delta airlines in July. Same goes to our national airlines didn’t stand a chance and fuel caused loses of 25 percent out of RM 2.52 billion was reported in last march. Whether it is a low cost or premium, it will hit hard on this sector. If they increase in fuel surcharge inevitably the price of flights tickets will have less quantity demand. Fuel as factors of production in order for them to operates. Both parties’ consumers and airlines will have to share the burden by paying half of the fuel surcharge. For people starting their businesses, this may put limitation or major setback because they have to pay more for transportation. They may have to utilize other medium such as teleconference or Skype in order to solve this predicament.

This crisis will dent the automobile industry since it’s the compliment good for fuel. People will no longer favor on buying SUVs and High fuel consumption cars. Car industry may have to cut down on worker’s salary as a solution to the problem on a short run since fuel is the fixed variable in this situation. They also may need to cut down the prices of the car in order to attract consumers with tied pockets. 

Tourism industry in our country will increase in expenses cost, inevitably open the alternatives of going for a vacation around Malaysia since it will be better to travel to Thailand or Indonesia with the same amount that they have to pay In their own country because everything is about value for money today. Besides, they are going to need to fill up those passports pretty quickly before it expires. We got to make the most out of everything right? As for our travel and tourism industry situation, five stars resort, restaurant or affiliated company such as scuba diving lesson like Naui may have to gives discount in order to attract more customers. 50 percent of something is better than 100 percent of nothing right?

Such huge impacts that fuel price change basically everything from our options, our balance in the bank, our decision and even the way we see the world. It is something that we have to carefully manage in order to maintain stability in our economy so everyone can have a piece of the cake that getting smaller every day.

Price of petrol in Malaysia remains constant despite the price rise in the global market

According to an article taken from ‘The Star’, The government would not increase the price of fuel nor reduce the original subsidy for the RON 95. In Malaysia, the price of petrol is one of the 20 cheapest in the world with the subsidy of thee government. The price of RON 95 petrol is priced at RM1.90 per litre after a RM1.09 subsidy. The price of petrol is comparably affordable compared to the price of in countries like Thailand, Indonesia, Philippines, and Singapore where the price ranges from RM3.00 to RM5.85 per litre. Consumerism Minister Datuk Seri Ismail Sabri Yaakob mentioned that if the petrol price were to be increased, the prices of all goods will rise simultaneously; this is going to form a huge burden to the consumers. The impact on the goods might multiply tremendously because the production costs from raw materials to final goods are already high, not to mention the selling price to the final consumers.

                According to the Law of Demand, when the price increases, the quantity demanded decreases. Apparently, this law fits well in this situation. For example, when the government announces that the petrol price will rise from a particular morning. Most likely the petrol station will be surprisingly crowded the night before. The demand will drop obviously on the first day of price hike, however, people that has a car and need to drive has to choice but to continue consuming. Alternatively, people might well switch to other options that does not require or require less petrol, for instance taking public transport, switching to a smaller car, using hybrid car, use NGV gas instead of petrol. In Malaysia, when income increases, people tend to improve their lifestyle and enjoyment for example buying a new or bigger car. In this case, the marginal benefit for this group of people is higher. As a result, petrol- a complement good will be demanded more as they are willing to pay for the price.

                Then again, when the price of petrol decreases, the supply decreases. As the price in the global market increases, Malaysia government still remains a low price for the citizens. Hence, the demand and supply appear to be higher all the while compared to other countries. Nevertheless, there was once where there is shortage in supply of petrol, where a few petrol stations in Klang Valley were ‘out of stock’. That is due to the 10 cents reduction in price during the Hari Raya season. In order to minimize the loss caused by the 10 cents reduction, petrol stations kept less than 50% of the amount they use to keep previously. Additionally, suppliers expect the future price to be higher, so they tend to decrease the supply until the price rises and earn more profit. As suppliers produce more, the marginal cost increases. Suppliers are only willing to sell more when the price is high enough to cover their high marginal cost, at least.

              The short term demand curve of petrol shows a very steep line. It appear to be highly inelastic (elasticity less than 1) because no matter what the price is, people will still have to purchase it due to the fact that fuel used in cars cannot be easily replaced with other substitutes. Elasticity measures how responsive people are towards the change in price. Are people going to stop driving because the price went up? Or quit our job and get a job somewhere nearer to the place they stay? There is nothing we can do but to accept the fact and pay the price. In other words, even there’s a huge change in price, the demand will only have a slight change. But, in the case of different brand of petrol, for example if Shell increases their prices and Petronas remain, the customers are more likely to switch to Petronas. This is because when consumers are sensitive towards the price, they are unconcern about the brand.

                With the subsidy of Malaysia government, citizens’ burden had lightened a lot. Thus consumers should have appreciated that because there is no such high subsidy in other countries. The opportunity cost of the subsidy is not able to allocate resources on other investment or subsidizing for a better health care, housing, education, public transport, and etc. Yet, the government had still decided to subsidize more on petrol so that it brings more marginal benefit to the country.

                In conclusion, besides the Law of supply and demand, the government is manipulating the price of petrol. At times, politics factor may also affect the prices, or cause unwanted shift of demand curve which affects the entire economic condition of the country. However, it is believed that the rapidly developing technology will eventually make us less dependent on petrol. For example hybrid or even solar energy car instead of relying on petrol which is slowly becoming scarce. The government can also come out with new fuel subsidy plans such as rebates for purchasing petrol.

Oil Price Reduction

Based on sources from Reuters, crude oil prices have declined by 4%. Barani Krishnan, in an article on www.in.reuters.com, 4^th October 2012, stated that U.S. posted that the drop in crude oil was at its all time low in four months. It has been a pressing issue that oil prices in the global economy have been falling. In addition to this, the recession in the European economy could contribute to the fall in oil prices. However, it is not just oil prices that will be affected in this case as all raw materials are affected as well. The European crisis could very well be threatening to the global economy as a whole. Commodities such as raw sugar and Arabica coffee are facing a decline in price as well. All this is due to the same economic condition, which is the recession faced by the European economy.

            Similar to the oil prices, retail sales have been dropping as well, according to the same article in Reuters. As the recession takes place, people would have less to spend on as they will want to save their income for necessities rather than luxuries. With the presence of public transport, citizens would rather save money on oil and take public transport. During a recession, demand for items like Arabica coffee, precious metals like silver, gold and copper would be less. As the quantity demanded for such items reduces, the quantity supplied would be less too. With this, the prices of those items are then reduced to encourage consumers to purchase those items.

            The recession causes people to give up a lot in terms of monetary items. When recession occurs, income earned by consumers is reduced. With that, income elasticity of demand will be less. When income is reduced, demand for inferior goods will skyrocket. This means that income elasticity of demand is negative. Inferior goods such as instant noodles will be in higher demand as consumers have a need to spend less into the economy. They will be fine in consuming less luxury goods. However, demand for necessities will not differ. This is due to the fact that consumers need items such as basic food, water, basic clothing and rent. Without the said items, they would not be able to continue their livelihood. The quantity demanded for such items will not differ; hence the quantity supplied would be the same too. As that happens, the prices of those goods will not be affected.

            In addition to that, producers who are producing necessities would not lose out. In fact, they will gain in the recession. These producers know that such items are needed by the public. In extreme cases, such producers will increase the price of necessity goods drastically. In a recession, such producers are affected too and they see this as an opportunity for them to receive higher revenue. However, this issue can be dealt with the implementation of the price cap by the government. A price cap helps to make sure that the prices set by producers are not too extreme. Not only that, it helps to prevent producers from taking advantage in situations like during the recession. By setting a price cap, producers have a guideline as to how much to charge for certain products. They will be able to gauge as to what is too much to charge. This will be beneficial to the consumers undergoing the recession.

            Beside the recession in Europe, the drop in commodities importing in China caused the prices of oil to decline drastically. China is a major importer of commodities according to an article in www.bbcnews.co.uk. Compliment that with the recession in Europe, there is sure to be an over-supply of oil in the global economy. Demand is reduced drastically which leads to an excess. It is a clear worry that producers are facing. China could be experiencing a cut in their economy. That can be seen through the fact that they are reducing their imports. It is obvious that they are trying to cut costs. Whatever the reason, it is not stated. This slowdown in exchanges between economies could lead to something bigger than what we already know. If not dealt with urgently, it could lead to disastrous results.

            Due to the drop in oil consumption, it is evident that retail sales are also affected. This is actually common sense, if you think about it. When people spend less on oil, they will have more to spend on retail items. However, as they purchase less oil, transportation will be an issue. This phenomenon will indirectly lead to them not wanting to go out and spend their income there. With that being said, there are also other substitute ways to increase retail sales. The younger generation is more prone to participate in online shopping. It is easier, faster and more convenient as they would not have to leave the comfort of their own homes.

            The fall in oil prices have led to producers gaining more than losing out. When oil prices are cheaper, they will have to spend less on transportation costs. Hence, production costs will be less. Consumers will then benefit from this fact. They will have to pay less to purchase goods. In other words, this would mean that quantity demanded of a good will be more and quantity supplied will also be increased. Then again, it depends on how much of the demand and supply is and whether or not one is more than the other or it is at an optimum level.

            Oil consumption that has fallen causes many other factors to be affected. An entire country’s economy can and will be affected by one very important factor. A recession, on the other hand, will also cause a major disruption in the global economy and has to be dealt with as fast and efficiently as possible. If not, there would be apocalyptic effects and will cause the global economy to worsen. Balance is very important in the world’s economy. 

A Cut in Taxes

Based on the Star Online dated 1^st October 2012 in an article by P. Aruna, it was stated that there would be a slash in individual tax rates by one percentage point by next year. Malaysians were told to anticipate a cut in taxes This tax cut is exclusive of tax reliefs and other such benefits. Based on researchers from Deloitte, the standard corporate tax rate is 25% whereas for smaller companies, it is 20%. This amount is indeed a very huge one as if the company is making on average 1 million a year, its corporate tax rate is 250, 000. Even with all the tax exemptions that the company gains, said company is still obliged to give up a lot in order to pay their taxes.

            With the cut in taxation rates, companies will be able to keep more profits for themselves. As they do so, said companies are capable of producing more products. Hence, supply is increased. They are able to produce more with the extra revenue that they save when they have less tax to pay. Although one percentage may not seem like a lot, but if put into context of a major company, for example Apple Inc, who made a gross income of $ 44.52bn in 2011 (www.marketwatch.com, 2012), 25% of that income will come up to approximately $11.13bn.

A cut in taxes enables big-name companies to increase their research and developments to come up with new products to be put out in the market. With all that being said, this could lead to market failure. This is due to the fact that when companies have the ability to produce more; supply will increase and as it is good for the company’s revenue, an issue of overproduction will also arise. Overproduction is indeed a market failure because too much of an item has been produced and the quantity supplied may also exceed the quantity demanded in the economy. Although resources have been used efficiently, producers mat react to the economic situation in accordance to their own interest. Yes, this is normal human mentality, selfishly only wanting the best for themselves, but the entire economy will be affected by the said selfishness and ultimately the ones most affected are the producers.

Overproduction will lead to a fall in price and an increase in quantity supplied of a product. True enough, consumers will benefit from the decline in the price of the good. However, producers may have to carry the burden of needing to face market failure issues such as buffer stock schemes. For some, such a scheme is possible but for others, it is not such a good idea. Take for example again, Apple Inc. Let’s say they engage in the buffer stock scheme and buy more resources just because of the tax cut, the technological trend changes are so frequent. If they do what is mentioned above, it will only cause them to incur losses in the future. Although it may seem beneficial at the moment, when their resources become obsolete and is no longer usable, Apple Inc will be faced with another problem; how to get rid of those items without being looked at as not being environmental friendly. It may seem like a minor issue, but the reputation of a company is crucial to any organization, like it or not; especially one that is as reputable as Apple Inc.  

            However, it is also safe to say that by reducing taxes, consumers will benefit greatly from this. Not only are there ample supply of goods in the market, the price of those items will be cheaper too. This is due to the fact that price of the goods will fall. This is all simple logic. When there are a lot of similar products in the market, competition will be very high and yes, it causes companies want to perform more efficiently. Thus, they will be competing among themselves to gain as many customers as possible and thus lower the prices of their products.

            That is not the only thing that is important, though. In the same article by P. Aruna in the Star Online, Prime Minister Datuk Seri Najib Tun Razak announced that there would be a one percentage reduction in individual income tax rates for each grouped annual income tax between RM2, 500 and RM50, 000 in his during the 2013 Budget speech. This is a good move as this cut in tax would help the middle income earners to save more money. However, it will not affect the very poor neither would it affect the very rich. More money will be able to be spent or saved by individuals because of the tax cut. This is good news for Malaysian citizens everywhere!

            The cut in tax, although having both pros and cons, will ultimately be a decision that is greatly supported by the citizens of Malaysia. Although companies will face some very serious issues if this is not handled properly, they too will benefit from this. It is common knowledge that anything that involves saving money, paying less or gaining anything from the government is indeed a good move. Large and small companies alike have to be more cautious as to how they deal with this issue. Being too greedy may result in the fall of the company whereas if they are too carefree and do not take the slightest advantage of the situation, it may be disastrous for them as well. As for individuals, middle income earners are the ones benefitting from this. Bad news for the low income earners and the wealthy, but they will survive. I, for one, am thrilled to hear this news! However, the philanthropist in me thinks that the government should come up with methods that are able to help the poor out and narrow the uneven income distribution that is so evident in our country. However, that is a whole other topic and not one to be discussed here or today.

Coco Cola: World’s Top 10 Most Valuable Brand

Based on an article from ‘The Star’ published on September 16, 2012, Coca Cola had been holding the top spot of the “world’s most valuable brand” survey. Coca Cola had been selling their carbonated drinks including Original Coke, Diet Coke, caffeine-free Coca Cola, Coca Cola Cherry, Coca Cola vanilla and special editions like Coca Cola with lemon, lime or coffee in more than 200 countries all over the world. It was reported that the profit earned was better than expected for the first quarter of 2012.

  Coca Cola managed to survive and make profit for 126 years, despite the tremendous production cost. The production cost of Coca Cola falls into three main categories, labor cost, material cost, and factory overhead. Among the three inputs, labor cost is comparably high. Thus in order to utilize the resources efficiently, Coca Cola would have to cut down the expenses in other categories. For example, the gasoline price spike triggered the selling price of Coke due the high transportation cost. With the intention of reducing the input price, more production facilities in more locations should be built, so that the company does not have to spend so much on transportation.

  Coca Cola had been introducing new and innovative products throughout these years. The company had spent a huge amount of money on surveys, researches, and development, to understand the market’s taste and trend. By doing this, the company had forgone the option to invest in new machines that can improve production. This became the opportunity of Coca Cola.

 The global demand of Coca Cola is assessed to be 1.5 billion servings per day. The quantity demanded of Coca Cola and the price always has an inverse relationship. The higher the price, the lower the quantity demanded by customers, and vice versa. This is shown by the Law of Demand, which results from substitution effect and income effect. When the price of a bottle of coke increases, the opportunity cost of consumers for choosing coke increases simultaneously. Thus consumers will switch to other substitutes such as Pepsi and Sprite, this causes the quantity of demanded for Coca Cola to fall. Meantime, when the price of a bottle of coke-a normal good, rises, and the income of consumers remain, consumers would not be able to afford the same amount the use to consume. Therefore the quantity demanded will drop. A couple of years ago, samples of coke were tested and the results show positive pesticide residue that may cause cancer in a few samples. This crisis forms a great impact on Coca Cola’s demand, the sales decreases by 11 percent at that period of time. In consequence, consumers started to switch from Coca Cola to other natural drinks.

  On the other hand, the Law of supply shows a positive relationship between price and quantity supplied. In the short run, when the price is higher, producers are willing to produce more to earn more profit. However, the price will only go up until a certain level as if the price boosted too high, consumers will switch to other close substitutes available. The high input price such as bottling cost, commodity cost, especially sugar, left Coca Cola enterprise with no choice but to increase the selling price and make consumers share out the cost. Also, Coca Cola’s demand had been increasing, particularly noticeable when Coca Cola partnered with McDonald’s.  

Coca Cola’s demand curve appears to be relatively elastic, having the elasticity greater than 1. This is due to the close substitute available in the market such as Pepsi- the second largest soda beverage producer. With that, a small change in price brings up a huge change in quantity demanded. For example, if Coca Cola happen to increase its price, more likely that they will lose their customers as there are other alternatives in the market that cost lower. Consumers tend to be more sensitive to the price when both products seems to be similar to them, not to mention that the market is now flooded with all kind of carbonated drinks. Besides, the income of consumers also determines the elasticity. For middle income group, the demand is elastic. When the price rises, it would be harder for this group of people to consume. Whereas for the other group of consumers that earns a higher income, they would not be as sensitive to the increment of price. There is also a positive relation between the change in income of consumers and the quantity demanded. Therefore, it is clearly shown that Coca Cola is a normal good, as people buy more when their income increases. Furthermore, coke is never a necessity to consumers. So the quantity demanded will fluctuate at times. Unlike necessity, people need the particular good no matter what the price is. In that case, the quantity demanded would be more stable with not many changes. Besides, the cross elasticity of demand appears to be positive between Coca Cola and its substitutes. Apparently, when the price of Coca Cola increases, the demand of Pepsi also increases.

   In all, the Coca Cola enterprise had been performing well all these years. Despite quality produces, the company also spends resources to produce products that match consumer’s preference. For example, produce beverages in different prices, sizes, and flavors for people from different region that might have different preference. Also, due to the elastic demand curve, the prices have never undergone any tremendous changes. The company is also experiencing growth and going global. With, they are able to offset the high commodity prices.