Question

Why doesn't Pepsi raise its price by over 5,000%? Use the concept of price elasticity of demand to figure out the answer to this question.

Answer 1

Pepsi doesn't raise its prices by over 5,000% because then no one would buy the product of the company.

According to price elasticity of demand, the higher the price, lesser is the demand as consumers are unwilling to spend a large amount if prices increase a lot. At the same time if the price reduces then the demand would increase because consumers purchasing power increases.

Pepsi is not necessarily an essential commodity, wherein even if the price increases, demand will continue to be the same and not fall, such as in the case of essential commodities such as milk, tea. But even if the prices rise for these products which face an inelastic demand, if the price rises by over 5,000% then demand will fall drastically for these products as well, which normally follows an inelastic demand.

Thus if Pepsi raises its prices exponentially, it would reduce the profitability and sales of its products as there would be no demand, because no one would be willing to buy Pepsi at such a high price which reduces the purchasing power of the consumer. Thus Pepsi faces an elastic demand curve as less number of individuals will buy it at a higher price.