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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 2 - 2019 - Paper 3
Question 2
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 2 - 2019 - Paper 3
Step 1
Reason 1: Luxurious Nature of Holidays
Answer
Holidays are often classified as luxury goods, which typically exhibit higher income elasticity of demand. As consumers' income increases, they tend to spend disproportionately more on holidays compared to essential goods. This is particularly relevant for all-inclusive holidays, which offer a sense of indulgence and value for money. Therefore, as disposable income rises, the demand for more expensive holiday options, like all-inclusive packages, can increase significantly.
Step 2
Reason 2: Variability in Consumer Preferences
Answer
The income elasticity of demand for holidays can also be influenced by the uncertainty surrounding economic conditions, such as fluctuations in the currency exchange rate. For instance, if the value of the UK pound decreases, holidays in destinations that rely heavily on the pound for pricing may become more expensive, leading to a greater sensitivity in demand. Consequently, when consumers feel more uncertain about their financial situation, they may become less willing to invest in longer holidays, thus making short-term breaks or staycations more appealing as incomes fluctuate.