Apply percentage changes in price and quantity demanded to calculate PED, classify responsiveness and connect the result to revenue, expenditure and pricing decisions.
What is the definition of price elasticity of demand?
the responsiveness of quantity demanded of a product to a change in income of consumers
the responsiveness of quantity demanded of a product to a change in the price of a complementary product
the responsiveness of quantity demanded of a product to a change in the price of that product
the responsiveness of quantity demanded of a product to a change in the price of a substitute product
Read the source material carefully before answering Question 1.
Source material: What does the future hold for Nicaragua?
Nicaragua is the largest country in Central America. It has a large agricultural sector with one of its main exports being coffee. It has been estimated that a change in the price of coffee will cause a change in the quantity of coffee demanded. The country's agricultural output, including coffee, is often affected by natural disasters including droughts and earthquakes.
Nicaragua is the country with the lowest Gross Domestic Product (GDP) per head in Central America. Wages are particularly low in the rural areas of the country. There is a high degree of income inequality and firms tend to earn lower profits than in other Central American countries. The number of Nicaraguans who were willing and able to work but could not find a job increased as calculated by both the claimant count and the labour force survey in 2020.
The purchasing power of Nicaraguan consumers fell in 2020 as prices rose by more than incomes. However, the country's currency, the cordoba, was still generally acceptable. It continued to act as a medium of exchange and store of value.
Nicaragua's future economic performance will be influenced by a number of factors. These include the proportion of the labour force employed in agriculture, the size of the country's firms and what the country produces. Table 1.1 shows the percentage of the labour force employed in agriculture and GDP per head in selected countries in 2020.
Table 1.1 The percentage of the labour force employed in agriculture and GDP per head in selected countries in 2020
Nicaraguan firms tend to be relatively small. These firms often get to know their individual customers' requirements but many are not large enough to benefit from economies of scale. In recent years, there has been a boom in coffee shops in Nicaragua. Between 2015 and 2020, the number of coffee shops more than doubled in the country. These shops differentiate themselves through their customer service and the quality of the coffee they serve.
Nicaragua is the world's twelfth largest producer of coffee. Global coffee consumption continues to increase. This trend may increase Nicaragua's coffee output and exports.
Calculate the price elasticity of demand for coffee.
Read the source material carefully before answering Question 1.
Source material: The advantages of visiting, producing and living in Bermuda
Bermuda is a well-known holiday destination. It offers luxury holidays which are expensive.
Bermuda bans foreign fast-food outlets. It does have one foreign outlet selling fried chicken in the island's capital, Hamilton. This was opened before the ban was introduced in 1997. Some foreign multinational companies (MNCs), which produce other goods and services, operate in Bermuda. Bermuda is considered a tax haven. It does not have any corporation tax, but it does charge high import tariffs particularly on demerit goods which are harmful to health.
Bermuda has a higher literacy rate and a lower population growth rate than most other countries. Its GDP per head is high. Fig. 1.1 shows the relationship between GDP per head ($) and life expectancy (years) in selected countries in 2018.
Fig. 1.1 The relationship between GDP per head (\$) and life expectancy (years) in selected countries 2018
Bermuda also has a relatively larger tertiary sector than most other countries. Insurance and other financial services contributed of its GDP in 2018. The Bermudian Monetary Authority (BMA) carries out most of the functions of a central bank. For example, it acts as banker to the government, holds the country's reserves of foreign currency and implements the government's monetary policy. The BMA has been relatively successful in keeping inflation low. However, government policy measures designed to reduce unemployment may affect the inflation rate. This is because policy measures can influence total demand, productivity and firms' costs of production.
Bermudian government policy may change, not only to cut unemployment, but also to reduce market failure. For example, higher indirect taxes on demerit goods may be used but it can be difficult to change people's spending patterns.
Identify two reasons why demand for holidays in Bermuda may be price-elastic.