Price elasticity of demand (PED) — practice question

Read the source carefully before you answer Question 1. Source material: What might the future look like for Nicaragua? Nicaragua is the largest nation in Central America. It has a substantial agricultural sector, and coffee is one of its main exports. It has been estimated that a $10\%$ change in the price of coffee will lead to a $3\%$ change in the quantity of coffee demanded. The country’s agricultural output, including coffee, is often disrupted 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 the 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 rose in 2020, as shown by both the claimant count and the labour force survey. In 2020, the purchasing power of Nicaraguan consumers declined because prices increased by more than incomes. Even so, the country’s currency, the cordoba, still remained widely accepted. 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 share 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. Nicaraguan firms are usually relatively small. Such firms often know the needs of their individual customers, but many are not large enough to gain economies of scale. In recent years, Nicaragua has experienced a boom in coffee shops. Between 2015 and 2020, the number of coffee shops in the country more than doubled. These shops distinguish 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 rise. This trend may increase Nicaragua’s coffee output and exports.