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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
a) Calculate the price elasticity of demand for tea
Answer
To find the price elasticity of demand (PED), we can use the formula:
PED = \frac{% \text{ change in quantity demanded}}{% \text{ change in price}}
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Calculate the change in quantity and price:
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Initial quantity = 97 million kilos, Final quantity = 76 million kilos
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Change in quantity = 76 - 97 = -21 million kilos
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Percentage change in quantity = ( \frac{-21}{97} \times 100 \approx -21.65% )
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Initial price = £7.20, Final price = £8.48
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Change in price = 8.48 - 7.20 = 1.28
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Percentage change in price = ( \frac{1.28}{7.20} \times 100 \approx 17.78% )
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Plugging these values back into the PED formula:
- PED = ( \frac{-21.65}{17.78} \approx -1.2 ) (This reflects an elastic demand.)
Step 2
b) Calculate the change in total sales revenue
Answer
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Calculate the original and new sales revenue:
- Original sales revenue = £7.20 × 97 million = £698.4 million
- New sales revenue = £8.48 × 76 million = £644.48 million
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Calculate the change in revenue:
- Change in revenue = £644.48 million - £698.4 million = -£53.92 million (This indicates a decrease in total sales revenue.)
Step 3