What this lesson teaches
I can explain how prices signal, give incentives and ration scarce resources in a free market.
Syllabus 9570, 2.1.1(a). Price Mechanism and its Functions: How the price mechanism allocates scarce resources in the free market through signalling, incentive and rationing functions
I can find the equilibrium price and quantity where demand meets supply.
Syllabus 9570, 2.1.2(e). Demand and Supply Analysis and its Applications: The equilibrium market price and quantity are determined by the interaction of demand and supply
I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.
Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus
Make a guess
World coffee bean prices double, while a kopi stall's rent and wages stay the same. Will the price of a cup of kopi double too?
- Yes. The price of kopi follows the price of beans.
- No. The price of kopi will not change at all.
- No. Beans are only part of the cost of a cup.
Show the answer
No. Beans are only part of the cost of a cup.
Rent, labour, milk and sugar also go into each cup. Doubling one input raises the cost of a cup by much less than double.
A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.
This is a complete case study in exam format. It is about why world coffee bean prices rose and how that reached the price of kopi in Singapore. It has six parts worth 30 marks, like each H2 case study. In the exam you have 2 hours 30 minutes for two case studies, so allow about 75 minutes for this one, including reading time.
The events in Extract 1 are real. Every number in Figure 1 and Table 1 is illustrative: invented for practice, not official data.
Allow about an hour. Read the data and all three extracts first. Write each answer before you open its suggested answer, and use the level descriptors below to mark the 8- and 10-mark parts.
The extracts
Extract 1: A bitter harvest
In 2024 and early 2025, world prices of coffee beans climbed to record highs. Brazil and Vietnam, the two largest producers, suffered droughts and unusual heat that cut their harvests. At the same time, more people in China and other Asian economies are drinking coffee, adding to demand. Traders who expected prices to keep rising bought beans early to lock in supplies, which pushed prices up further. Roasters around the world passed some of the higher cost on to cafes and supermarkets. Written for these notes from public information.
Extract 2: Kopi gets dearer
Coffee shops in Singapore have raised the price of a cup of kopi, and many say they had little choice. Coffee powder, milk and sugar all cost more, and rents for stalls have gone up. Labour is another worry. Many stallholders are older, few young Singaporeans want to work long hours at a hot drinks stall, and assistants must now be paid more to stay. Some regular customers grumble but still buy their morning kopi. Others have switched to tea, or to cheaper instant coffee made at home. Written for these notes; the stall figures in Table 1 are illustrative.
Extract 3: Planting for the future
High prices encourage coffee farmers to look after their trees better, use more fertiliser and plant new trees. But a newly planted coffee tree takes about three to four years to produce a good crop, so supply cannot respond quickly. Some farmers are cautious, remembering years when a burst of planting led to a glut and prices crashed. Meanwhile, buyers have looked for cheaper beans and blends. If the weather returns to normal, harvests could recover and prices fall back, though few expect them to return to their old levels soon. Written for these notes from public information.
How the 8- and 10-mark parts are marked
Data parts (1 to 3 marks)
Point-marked. A 'describe' part gives 1 mark for the overall trend and 1 for a refinement. A 'calculate' part gives marks for the working and the answer; 'explain' adds a mark for what the result shows.
8 marks: L2 (4 to 6)
Both sides are explained with clear demand and supply reasoning and tied to evidence from the extracts. A top L2 answer develops both sides fully.
8 marks: L1 (1 to 3)
One-sided, or points listed without explanation, or little use of the case.
8 marks: E (1 to 2)
E2: a reasoned judgement in the context of the case that says what the answer depends on. E1: a judgement that is stated but not explained.
10 marks: L2 (4 to 7)
The strengths and the limits of the price mechanism are both developed with clear chains and case evidence. A one-sided answer is usually capped at about 5.
10 marks: L1 (1 to 3)
Mostly descriptive, one-sided, or not tied to the case.
10 marks: E (1 to 3)
E3: a well-reasoned judgement on how far the price mechanism solves the problem, considering time and fairness, with a conclusion. E2: a reasoned judgement with less support. E1: an unsupported judgement.
| Year | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|
| Index | 85 | 100 | 110 | 160 | 200 |
| 2022 | 2025 | |
|---|---|---|
| Price of a cup of kopi ($) | 1.30 | 1.60 |
| Cups sold per day | 400 | 380 |
| Daily wage of a stall assistant ($) | 80 | 95 |
Worked example: Calculate a change in revenue
Suppose a noodle stall sold 200 bowls a day at $4.00 last year and sells 180 bowls a day at $4.50 this year.
- Revenue = price x quantity sold.
- Last year: $4.00 x 200 = $800 a day. This year: $4.50 x 180 = $810 a day.
- Change: +$10 a day, a rise of about 1% (10 / 800 x 100).
- Explain: the higher price outweighed the fall in bowls sold, so revenue rose slightly.
Watch out for this
The price of coffee beans rose, so demand for coffee beans fell, so the price fell back down.
A rise in price causes a fall in quantity demanded, a movement along the demand curve. It does not shift demand, so it cannot push the price back down by itself.
Check your understanding
Droughts cut the coffee harvest while demand from Asia grew. What can you say for certain about the world coffee market?
- The price rose, but whether quantity rose or fell depends on which shift was larger.
- The price rose and the quantity fell, because the drought shift was the larger one.
- The price could rise or fall, depending on which shift was larger.
Show the answer
The price rose, but whether quantity rose or fell depends on which shift was larger.
Right. Both shifts push the price up. The supply fall cuts quantity, the demand rise raises it, so the net change in quantity is uncertain.