Higher Prices & Price Elasticity

I came across an article related to the American Journal of Public Health, which states that the consumption of sodas and sugary soft drinks are the ‘largest contributor to calorie intake in the United States.’ The research from the Journal suggests that this large consumption will increase the possibility of obesity and poor diet. To change the buying behavior of people who consume soda, there was a price increase of 45 cents. Here, I will examine price elasticity of soda, to see if there are any significant changes in the quantity demanded for the commodity in response to the increase in price.

The article states that a small increase in price did not significantly affect the consumption of soda. The price elasticity of demand measures the responsiveness in the quantity demanded of a commodity to a change in its price.

If consumers did not change their total expenditures on soda after a small increase in price this would make soda unit elastic, (at the midpoint on the demand curve) where total expenditures ends up be the same at every point on a unit elastic demand curve for the commodity. Elasticity would equal -1, where there is a 1:1 ratio in the percent change in the quantity demanded and percent change in price.

It is also possible that soda was price inelastic, (which is most likely) where elasticity would be between -1 and 0, (below the midpoint on the demand curve) indicating that consumers were unresponsive to the small change in price and consuming a similar amount of soda. Here, there is a greater percent change in price than in the percent change in the quantity demanded. In this case, firms and suppliers of soda are happy because when there is an increase in price and the good is inelastic, total revenue for the firm will increase.

If consumers in fact did change their total expenditures on soda (since the article stated ‘significantly’, there may have been a small change in consumption) after a small increase, this would make soda price elastic, where total expenditures would decrease, showing that total expenditures and price move in opposite directions when the commodity is elastic. Elasticity would be between - ∞ and -1, where the increase in price will affect the quantity of soda demanded. Here, there is a greater percent change in the quantity demanded than in the percent change in the price. In this case, firms and suppliers of soda are not happy because when there is an increase in price and the good is elastic, total revenue for the firm will decrease.

The article states that with a 45 cent increase in price (a 35 percent increase), sales decreased by 26 percent. If we do the math (% ∆ Qd)/(% ∆P) = (-.26/.35) = -0.74, we find that even with a significant increase of 45 cents, soda is still price inelastic (between -1 and 0), where overall consumers are unresponsive to the change in price. Even though sales have decreased, the price increase is not significant enough to change the buying behavior of consumers. The author is confused. The commodity needs to be price elastic (greater than -1) for there to be a significant change in buying habits for consumers.

The author noted that there was an increase in the sales of coffee and diet soft drinks when there was a price increase for soda. This suggests that coffee and diet soda are substitutes for soda, where the price increase in soda results in an increase in the quantity purchased of coffee and diet drinks. One thing that determines the price elasticity of a commodity is whether or not there are a large number of substitutes. The closer and greater the number of substitutes, the elasticity is larger. However, the number calculated above does not show that soda is price elastic at this point. This would mean that the value -0.74 already reflects these substitutes. If there were no substitutes, soda would be even more inelastic or closer to being perfectly inelastic. The buying behaviors of consumers will not change significantly like the author implies they will. If there is a large and significant increase in the price of soda, people would likely respond better to the increase in price and decrease consumption. This would clearly make soda price elastic, where demand is sensitive to changes in price.