Cambridge International as and a level Economics Ebook

1 a
Excluding price, state and explain 
two
other 
factors that determine the demand for raw coff ee 
on world markets.
b 
Would you expect the price elasticity of demand 
for instant coff ee to be relatively elastic or 
inelastic?
c 
Would you expect this estimate to be the same 
for Nestlé’s instant coff ee?
2 a
Excluding price, state and explain 
two
other 
factors that determine the supply of raw coff ee on 
world markets.
b 
Would you expect the price elasticity of supply 
for raw coff ee to be relatively elastic or inelastic? 
Justify your answer.
c 
Would you expect the price elasticity of supply 
for instant coff ee to be relatively elastic or 
inelastic? Justify your answer.
A
 
coff ee farm in Kenya
50
Cambridge International AS Level Economics

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Price elastic PED and total expenditure/total revenue
PED can help us understand how total spending by 
consumers will change as price rises or falls.
Total expenditure 
=
P 
×
Q
, where
 P 
is price and
 Q 
is quantity
=
Total revenue for a business or industry
In 
Figure 2.8
, assume there are two products each with the 
same price ($10) and quantity traded (100 units per day). 
Total expenditure by consumers per day 
=
$10 × 100 
=
$1,000 – this is, of course, equal to the revenue received by 
companies. Now, if the price rises to $11, the diff erences 
in PED indicate that consumers respond in diff erent ways, 
and the total expenditure will change:
■ 
D
e
is relatively price elastic over the relevant price range, 
and quantity falls considerably to 80 units (PED 
=
–2). Total 
expenditure is now down to $880 per day – the reason, of 
course, is that the relative fall in sales is greater than the 
relative increase in price.
■ 
D
i
 
is relatively price inelastic over the relevant price range 
and the quantity traded only falls slightly to 95 units 
(PED 
=
– 0.5). Total expenditure actually rises even though 
less is traded. The reason is that the increase in price exerts 
a more powerful influence in this case.
Price (US$)
80
95 100
11
10
Quantity
D
e
D
i