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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
Reason 1: Luxury Nature of Holidays
Answer
Income elasticity of demand (YED) measures how responsive demand is to changes in consumer income. Holidays are often viewed as a luxury good. As income increases, consumers tend to spend more on all-inclusive holidays, making them more income elastic. For instance, higher incomes can lead individuals to choose more expensive holiday options, resulting in a proportionally larger increase in demand, demonstrating a higher YED.
Step 2
Reason 2: Certainty in Expense
Answer
With currency fluctuations, such as the UK £ sterling exchange rate, consumers may feel uncertain about budgeting for holidays. This uncertainty could lead to an increase in the YED for all-inclusive holidays. When consumers perceive that total costs are more certain, they may be more willing to spend on such holidays. As a result, if incomes fall, the demand for these holidays may not decrease as significantly, indicating higher income elasticity.