Price elasticity of demand (PED) — practice question

Read the source material carefully before you answer Question 1. Source material: What might lie ahead for Nicaragua? Nicaragua is Central America’s largest country. It has a substantial agricultural sector, and coffee is one of its main exports. It has been estimated that if the price of coffee changes by 10%, the quantity of coffee demanded changes by 3%. The country’s agricultural output, including coffee, is frequently affected by natural disasters such as droughts and earthquakes. Nicaragua has the lowest Gross Domestic Product (GDP) per head in Central America. Pay is especially low in rural areas of the country. Income inequality is high, and firms usually make lower profits than those in other Central American countries. The number of Nicaraguans who were willing and able to work but could not find a job increased, as measured by both the claimant count and the labour force survey, in 2020. In 2020, the purchasing power of Nicaraguan consumers fell because prices rose by more than incomes. Even so, the country’s currency, the cordoba, remained generally acceptable. It continued to function as a medium of exchange and a store of value. Nicaragua’s future economic performance will be shaped by several factors. These include the proportion of the labour force employed in agriculture, the size of firms in the country and the types of output 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. Nicaraguan firms are generally quite small. They often learn the needs of individual customers, but many are not large enough to benefit from economies of scale. In recent years, coffee shops have boomed in Nicaragua. Between 2015 and 2020, the number of coffee shops in the country more than doubled. These shops set themselves apart 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 rise. This trend may increase Nicaragua’s coffee output and exports.