Marina Café is popular with tourists and locals in the town of Budva, Montenegro. It is situated next to the sea, with views of the surrounding mountains. Customers can enjoy their drinks whilst benefitting from the pleasant surroundings but pay €2.00 for a cup of coffee. The same brand of coffee can be bought for €0.80 a cup in some other cafés in Budva.
With reference to the data above and your knowledge of economics, analyse why price elasticity of demand (PED) may be relatively inelastic at Marina Café. (6 marks)
November 2023 Paper 1: Microeconomics and Business Economics 4EC1/01 (QP)
Price elasticity of demand (PED) is the responsiveness of demand to a change in price. Inelastic demand means a rise in price will lead to a smaller percentage change in the quantity demanded
One reason coffee is demand is price inelastic here is because the coffee costs a small proportion of income. Despite the price increasing from 80 cents to 2 euros compared to other locations, people are still willing and able to buy the coffee as it doesn't take up much of their disposable income.
Secondly, demand is price inelastic because coffee is somewhat addictive, or at least habitual. Many people need/want to consume at least one cup of coffee every day, and therefore they are happy to pay a higher price if this is the first cafe they see during the day.