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Using the data in Extract A, assess two reasons why income elasticity of demand for holidays may be income elastic. - Edexcel - A-Level Business - Question 1 - 2019 - Paper 3
Question 1
Using the data in Extract A, assess two reasons why income elasticity of demand for holidays may be income elastic.
Worked Solution & Example Answer:Using the data in Extract A, assess two reasons why income elasticity of demand for holidays may be income elastic. - Edexcel - A-Level Business - Question 1 - 2019 - Paper 3
Step 1
Income elasticity of demand (YED) measures the responsiveness of demand to changes in consumer income.
Answer
Income elasticity of demand (YED) indicates how the quantity demanded of a good changes in response to changes in consumer income. Holidays, particularly all-inclusive holidays, are often considered luxury items. As disposable incomes increase, the demand for holidays tends to rise more than proportionally, making it income elastic. For instance, when individuals experience an increase in income, they are more likely to indulge in extended vacations or luxurious holiday packages.
Step 2
Holidays are viewed as luxury items, making them income elastic.
Answer
In the context of Extract A, the rise in the UK £ exchange rate and economic conditions impacts the cost of holidays. As travel and accommodations become more affordable due to a stronger pound, consumers are more inclined to spend on holidays. Therefore, with incomes rising or even remaining stable, the demand for luxury holidays increases sharply. This reinforces the notion that as income rises, consumers are willing to spend more on holidays and experiences, hence demonstrating income elasticity.