Mid Term

Assignment
ON

DEMAND, SUPPLY & MARKET

EQUILIBRIUM

OF PEPSI COLA

Subject: Micro & Macro Economics

SUBMITTED TO
Prof. Hina Shafique

SUBMITTED BY
Huma Shaheen
BBHM-F14-32
Iqra Allah Wdhaya
BBHM-F14-30
Muhammad Shahzeb
BBHM-F14-02
Muhammad Tanveer
BBHM-F14-11
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Kashif Ali
BBHM-F14-09

Superior
University Lahore
(Okara Campus)
History of Pepsi:
Pepsi Cola is, just like Coca-Cola, a creation of an
American pharmacist. In 1893, 5 years after the introduction of Coca-Cola, Caleb Bradham
began to serve his customers Brads Drink from his own soda machine. Because of the
positive reactions of his samplers he decided to begin advertising in 1898 and he named the
drink Pepsi-Cola.
He founded the Pepsi-Cola Company in 1902. Pepsi-Cola is a big success in the United States
and the Pepsi-Cola Company decides to export the drink to Mexico in 1907, other countries
would follow soon.
The company invested in sugar and is declared bankrupt in 1923 due to the collapse of sugar
prices. After a couple of reorganizations, the Pepsi-Cola Company is bought by Loft Inc. in
1931. Because of the popularity of Pepsi, Loft changes its name to Pepsi-Cola Company in
1941.
Pepsi-Cola is referred to as the kitchen cola in the 1960s because its much cheaper than
competing drinks. The company decides to focus their advertising strategy on the post-war
baby boom generation. One
of the new slogans is: Now
its Pepsi, for those who think
young. Diet Pepsi is
introduced in 1964 for people
who would like to live
healthy.
The PepsiCo Company was
founded in 1965 by the
president of the Pepsi-Cola
Company and the chairman of Frito-Lay. It produces
and sells not only soft drinks like Pepsi, 7-Up,
Mountain Dew, Miranda and Gatorade but also snacks like Lays, Doritos, Hamkas and
Quaker cereals in 192 countries.
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Famous people like Michael Jackson,

Turner, Shaquille ONeal, the Spice Girls, David
Beckham, Britney Spears and Cindy Crawford
appeared in Pepsi commercials in the 1980s and
1990s to emphasize that Pepsi is the drink for the
new generation.

Lionel Richie, Tina

Vision
PepsiCo's responsibility is to continually improve all aspects of the world in which we
operate, environment, social, economic - creating a better tomorrow than today."
Our vision is put into action through programs and a focus on environmental stewardship,
activities to benefit society, and a commitment to build shareholder value by making PepsiCo
a truly sustainable company.

Mission
Our mission is to be the world's premier consumer Products Company focused on convenient
foods and beverages. We seek to produce financial rewards to investors as we provide
opportunities for growth and enrichment to our employees, our business partners and the
communities in which we operate. And in everything we do, we strive for honesty, fairness.

Objective

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The major objective of the Nau-Bahar

Bottling Co. is to manufacture and

provide the best quality which must meet the national and international standards. The
company is committed to provide the maximum level of customer satisfaction.

Pepsi Pakistan:
The market in Pakistan is surely dominated by Pepsi. It has proven itself to be the No.1 soft
drink in Pakistan. Now days Pepsi is recognized as Pakistanis National drink. In 1971, first
plant of Pepsi was constructed in Multan, and from their after Pepsi is going higher and
higher. Pepsi's greatest rival is Coca Cola. Coca Cola has an international recognized brand.
Coke's basic strength is its brand name. But Pepsi with its aggressive marketing planning and
quick diversification in creating and promoting new ideas and product packaging, is
successfully maintaining is No.1 position in Pakistan. In coming future Pepsi is also planning
to enter into the field of fruit drinks.
When Pepsi was introduced in Pakistan, it faced fierce competition with 7up, lemon and lime
drinks, which was established during 1968, in Multan. Pepsi introduced its lemon and lime,
"Teem" to compete with 7up. It successfully, after some years, took over 7up, and this
enhanced Pepsi's profits and market share. In Pakistan, Pepsi with 7up enjoys 70% of the
market share whereas the coke just has 20% markets share. Pepsi Cola International has a
good name in Pakistan and doing its business through franchising system. PCI has developed
the following 10 franchisers in Pakistan.

Karachi
Lahore
Multan
Faisalabad
Gujranwala
Peshawar
Islamabad
Sukkhar

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Hyderabad
Quetta

Management Hierarchy
Managing Director

Director

General Manager

General Manager (Local Sales)

General Manager (Out Sales)

Plant Manger
Marketing & Services Manager

Production
Manager

QC Manager

HR Manager
Audit ManagerPurchaseFinance Manager MIS
Manager
Manager

Shipping
Manager

Store
Manager

S & D Mangers
Assistant Manager Marketing & Services
Publicity Manager

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The law of demand

Demand: is the total amount of goods and services that consumers are willing and able to
purchase at a given price in a given time period.

The Law of Demand: states that "as the price of a product falls, the quantity demanded of
the product will usually increase.

The demand curve:

Demand curve: represents the relationship between the price and the quantity demanded of a
product.

Figure 1.1 - A demand curve

Factors that change demand or shift the demand curve:

The non-price determinants of demand (shifting) for normal & inferior goods:
1.

2.

Income: As income rises

demand for normal goods rises, demand curve shifts to the right

demand for inferior goods falls, demand curve shifts to the left (when income
gets to certain level, demand will become zero and so the demand curve
disappears)

Taste & Preferences: Change in tastes in favor (i.e. advertising campaign) demand
curve shifts to the right

3.

Price of substitutes and complements:

As price of substitutes increases (movement along the curve) the

demand shifts to the right.
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As
price
of
complements
along the curve) the demand shifts to the left.

increases

(movement

Demographic changes: if population grows, the demand for most products will

4.

increase, thus the demand curves shift to the right? More will be demanded at each price
level.

Movements along and shifts of the demand curve

Movement along the demand curve:

A change in price of the good itself leads to a movement along the existing demand
curve (price is the axes), while a change in any other determinants of demand will
always lead to a shift of the demand curve to either left or to the right.
Figure 1.2 - Movement along and a shift of the demand curve

The law of supply

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Supply: is the total amount of goods

and services that producers are willing

and able to purchase at a given price in a given time period.

The law of supply: states that "as the price of a product rises, the quantity supplied of the
product will usually increase, ceteris paribus".

Price rises but costs do not change profitability increases supply more (increase
profits)

The supply curve:

Supply curve represents the relationship between the price and the quantity supplied of a
product.

Figure 1.3 - The supply curve

Factors that change supply or shift the supply curve:

The non-price determinants of supply (shifting):

1.

Changes in costs of factors of production: Increase in costs of

production supply shifts to the left

2.

land

labor

capital

entrepreneurship (human capital or intellectual capital)

State of technology: Improvements in technology supply shifts to the right

(natural disasters may move the technology backwards supply shifts to the left).

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3.

Price of relating product: if

producer could produce another
product with higher profit, due to limited resources, the supply for the existing product
decreases.

4.

Expectations: if demand for the product is likely to rise supply increases (ready
to supply more in the future and gain higher profit).

5.

6.

Indirect taxes & subsidies:

Indirect taxes increase costs supply shifts left

Subsidies reduce costs supply shifts right

Number of firms in the market: more firms producing supply shifts to the
right more are being supplied at each price level.

Movements along and shifts of the supply curve

Movements along the supply curve:

A change in price of the good itself leads to a movement along the existing supply
curve (price is the axes), while a change in any other determinants of supply will
always lead to a shift of the demand curve to either left or to the right.

Figure 1.4 - Movement along and shift of the supply curve

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Market Equilibrium:

A market occurs where buyers and sellers meet to exchange money for goods.
The price mechanism refers to how supply and demand interact to set the market price
and amount of goods sold
At most prices planned demand does not equal planned supply. This is a state of
disequilibrium because there is either a shortage or surplus and firms have an
incentive to change the price.

Market equilibrium:
Market equilibrium occurs where supply = demand. At this point, there is no tendency for
prices to change. We say the market clearing price has been achieved.
In the diagram below, the equilibrium price is Pe. The equilibrium quantity is Qe.

If price is below the equilibrium:

If price was below the equilibrium at P2 then demand would be greater than the
supply. Therefore, there is a shortage of (Q2 Q1)

If there is a shortage, firms will put up prices and supply more. As price rises there
will be a movement along the demand curve and less will be demanded.

Therefore, price will rise to Pe until there is no shortage and supply = demand

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If price is above
equilibrium:

the

If price was above the equilibrium (e.g. P1), then supply (Q1) would be greater than
demand (Q3) and therefore there is too much supply. There is a surplus.

Therefore, firms would reduce price and supply less. This would encourage more
demand and therefore the surplus will be eliminated. The market equilibrium will be
at Q2 and Pe.

Movements to a
Equilibrium:

new

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If there was an increase in income the

demand curve would shift to the right
(D1 to D2). Initially there would be a shortage of the good, therefore the price and quantity
supplied will increase leading to a new equilibrium at Q2
An increase in supply would lead to a lower price and more quantity sold.

Data Description
The following table shows the data pertaining sale, demand, supply, expenditure, and
substitute price (Pepsi cola). The data is expressed in millions, various types of results are
applied on the data in order to find the normality of the data and the market position of the
product the results are as followings.

Sale
2.30
4.00
3.00
3.60
3.80
3.50
3.90
4.00
4.30
4.20
3.80
4.20
2.80
3.60
3.43
3.20
3.60
3.20
4.30
4.50
3.10
2.76

Demand
1.60
3.40
2.50
2.90
3.10
3.20
3.00
3.60
3.80
2.40
3.90
5.00
4.30
3.20
3.80
4.20
3.60
3.60
2.90
3.20
3.60
3.50

Supply
3.00
3.40
2.40
4.30
3.80
2.80
2.67
3.10
3.40
2.80
3.60
3.80
3.00
3.90
4.10
4.30
3.20
3.80
4.20
3.60
3.20
4.30

Expenditur Substitute
e

price

4.30
4.10
3.23
3.45
3.80
2.98
3.89
3.78
3.50
1.60
3.40
2.50
3.00
3.10
4.20
3.00
2.97
3.80
2.40
2.70
3.70
4.30

3.20
3.50
3.90
2.80
3.70
3.70
2.60
3.00
4.00
3.00
3.40
2.40
3.20
3.60
2.80
3.40
3.10
2.80
2.80
3.60
3.80
3.00

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Model Summary
Model

R Square

.511

Adjusted R

Std. Error of the

Square

Estimate

.261

.087

Durbin-Watson

.55185

1.814

a. Predictors: (Constant), Substitite.Supply, Expenditure, Demand, Supply

b. Dependent Variable: Sale
The coefficient of correlation determines the overall strength of the relationship between the
variables included in the model. While the r-square value determines the goodness of fit of
the model a low value of square i.e. 0.261 indicates that model needs to be more precisely
specified.
ANOVA
Model

Sum of Squares
Regression

Model

Residual
Total

1.827

Mean Square
4

5.177
Unstandardized Coefficients
7.004
B

df

.457

.247b

1.500

17
.305
Standardized
t
21
Coefficients

Std. Error

Sig.

Sig.

Beta

a. Dependent Variable: Sale

1.477
2.906
.010
b.(Constant)
Predictors: (Constant),4.291
Substitite.Supply,
Expenditure, Demand,
Supply
Demand
.182model is insignificant
.118
.528
.605
The
ANOVA table shows .096
that the overall
i.e. the null
hypothesis
is accepted at 5.098
%
Supply
.232
.098
.422
.678
Expenditure

Collinearity Statistics

Tolerance

VIF

.864

1.157

.812

1.232

-.405

.179

-.480

-2.263

.037

.967

1.034

Substitite.Supply
-.002
level
of significance
a. Dependent Variable: Sale

.281

-.001

-.006

.995

.914

1.094

Y o 1 X 1 2 X 2 3 X 3 4 X 4

Y Sale
X 1 Demand
X 2 Supply
X 3 Expenditure
X 4 Substitute Pr ice
The estimated model is as followed
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Y 4.291 .096X 1 0.098X 2 -0.405X 3 -0.002X 4

Collinearity Diagnostics

a.

1
2
3
4
5

Eigenvalu Condition
Variance Proportions
e
Index
(Constan Deman Supply Expenditur Substitut
t)
d
e
e Price
4.903
1.000
.00
.00
.00
.00
.00
.045
10.385
.00
.38
.03
.29
.03
.028
13.298
.01
.00
.08
.42
.31
.019
16.033
.01
.55
.61
.23
.00
.005
32.235
.98
.06
.28
.05
.66

Dependent Variable: Sale

Residuals Statistics
Minimu Maximu
m
m
Predicted Value
2.9925 4.1429
Residual
-.97776 .73486
Std. Predicted
-2.043
1.858
Value
Std. Residual
-1.772
1.332
a. Dependent Variable: Sale

Mean
3.5950
.00000

Std.
Deviation
.29494
.49652

.000

1.000

22

.000

.900

22

22
22

Residuals are used to estimate the outliers present in the data

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15 | P a g e

The above graph shows the normality of the data

Recommendations:
From the above model one can see that the expenditure and substitute price has a negative
impact on sale of Pepsi cola. So that the evaluation of alternate price should be studied in
detailed. Some undefined factors are also needed to be identified whose effect is considered
in the error term. The value of r square indicates only 52 % of variation explained by the
factors including in the model.

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