Knowledge - 2 marks
Application - 2 marks
Analysis - 2 marks
Eval - 2 marks
Structure
Para 1: Knowledge - Define an economic concept from the question
Para 2: Analysis - Answer the question + application
Para 3: Evaluation - Provide the opposing view + knowledge
Para 4: Analysis - Answer the question + application
Para 5: Evaluation - Provide the opposing view
Price elasticity of demand measures the responsive of demand given a change in the price. It is calculated using the formula PED = % change in quantity demanded for good A/ % change in price of good A.
One factor that may have caused an increase in the price of coffee is a rise in demand. Demand refers to the quantity consumers are willing and able to pay for a good at different prices. An increase in demand may have occurred due to a rise in incomes. The impact can be seen on the diagram, demand for coffee shifted out from D1 to D2 and as a result price increased from P1 to P2. As the extract states, between February 2020 and March 2020, the price of coffee increased from $2.99 per kilo to $3.27.
However, this may not always be the case, today drinkers are wearier of coffee related health problems. People may be concerned with the impact of coffee on their health as it contains caffeine. This may be seen as unhealthy and therefore demand may not shift out and thus prices may not increase.
Another reason why the price may change is a decrease in the supply of coffee. Supply refers to the quantity firms are willing and able to provide of a good at any price. They may have reduced supply due to a natural disaster. As such, farmers were not able to produce as many coffee beans. As a result, supply of coffee shifted in from S1 to S2 and price increase from P1 to P2. As the data shows, from March 2020 to April 2020, price increased by 4.28%.
However, this may not always be the case as farmers could have stockpiled coffee beans and thus released them during the natural disaster. As such, supply may not have shifted in and price may not be impacted.
