Price elasticity of demand for petrol and carbonated drink
Petrol is one of the essential products in every economy. People drive petrol-fueled cars to work, industries use petrol-fueled machines, and companies use petrol to produce electricity. Petrol is one of the products whose price change has little effect on demand. A rise in the price of petrol is likely to lead to a significantly lower reduction in demand. The rise in the price of petrol may force people to undertake activities that consume less petrol. People may use more energy-efficient equipment to reduce their consumption of petrol. On the other hand, the carbonated drink has an elastic demand. An increase in the price of carbonated drinks would lead to a significant reduction in their demand. It is because the carbonated drink is not a necessity. Therefore, the demand for a carbonated drink is more elastic than the demand for petrol.
Income Elasticity of Demand for carbonated drink and petrol
A change in income results in a significant change in disposable income. An increase in income would increase demand for petrol. It is because it would enable more people to afford cars. Besides, the increased disposable income would enable people to afford various products whose production involves the consumption of petrol. An increase in disposable income would also increase the demand for carbonated drinks. On the other hand, a reduction in income would reduce the demand for petrol as it reduces people’s disposable income. Reduced income would also reduce the demand for carbonated drinks. The income elasticity of demand for carbonated drinks is higher than that of petrol. It is because there are few substitutes for petrol. However, there are many substitutes for carbonated drinks.
Cross price elasticity of demand between Coke and Pepsi
Pepsi and Coke are substitute products. Therefore, a decrease in demand due to the increase in the price of one product would increase demand for the other product if its price remains constant. The formula for calculating cross-price elasticity is (%ΔQ)/(%ΔP), where %ΔQ refers to the percentage change in demand and %ΔP refers to the percentage change in price. Therefore, if an increase in the price of Coke by 10% results in a 20% increase in the demand for coke, then the price elasticity of demand between Coke and Pepsi is 2 (20 divide by 10 is 2). A cross-price elasticity of demand that has a value that is greater than zero shows that the products are substitutes. Therefore, a change in the price of one product would result in a change in demand for the other product.
Cross price elasticity between carbonated drink and petrol
Carbonated drinks and petrol are not substituted products. A change in the price of petrol would not have a significant effect on the demand for carbonated drinks. One can only substitute carbonated drinks with other drinks. Therefore, the cross-price elasticity between carbonated drink and petrol is zero.
The most viable investment between carbonated drinks and petrol
Petrol is one of the major commodities in the market. Change in the price of petrol has a very limited effect on its demand. Very few factors affect the demand for petrol. On the other hand, carbonated drinks are not necessities. A change in the price of carbonated drinks would have a significant effect on its demand. Therefore, it is better to invest in the stocks of petrol companies than investing in the stocks of carbonated drink companies.