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Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 1
Question 2
Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo. Over the same period the quantity of tea purchased fell fro... show full transcript
Worked Solution & Example Answer:Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 1
Step 1
Assume that the change in the quantity of tea purchased was only caused by the change in the price of tea. Calculate the price elasticity of demand for tea in response to the rise in its price. You are advised to show your working.
Answer
To calculate the price elasticity of demand (PED), we use the formula:
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Calculate the percentage change in quantity demanded:
- Initial quantity = 97 million kilos
- New quantity = 76 million kilos
- Change in quantity = 76 - 97 = -21 million kilos
- Percentage change = ( \frac{-21}{97} \times 100 \approx -21.65% )
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Calculate the percentage change in price:
- Initial price = £7.20
- New price = £8.48
- Change in price = 8.48 - 7.20 = 1.28
- Percentage change = ( \frac{1.28}{7.20} \times 100 \approx 17.78% )
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Substitute these values into the formula:
Step 2
Calculate the change in total sales revenue for UK tea retailers between 2010 and 2015. You are advised to show your working.
Answer
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Calculate the original sales revenue:
- Original price = £7.20 per kilo
- Original quantity = 97 million kilos
- Original sales revenue = £7.20 × 97 = £698.4 million
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Calculate the new sales revenue:
- New price = £8.48 per kilo
- New quantity = 76 million kilos
- New sales revenue = £8.48 × 76 = £644.48 million
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Calculate the change in revenue:
- Change in revenue = New sales revenue - Original sales revenue
- Change in revenue = £644.48 - £698.4 = -£53.92 million.
Step 3