Photo AI
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. Research by the Association of British Travel Ag... show full transcript
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
First Reason: Luxury and Income Elasticity
Answer
Holidays are generally considered a luxury good, making their demand income elastic. As consumer incomes rise, individuals are more willing to increase their spending on holidays. Conversely, in times of economic downturn, consumers may cut back on these non-essential expenditures. This responsiveness to income changes means that the income elasticity of demand for holidays is greater than one (YED > 1), indicating a strong relationship between income changes and demand.
Step 2
Second Reason: Uncertainty and Budgeting
Answer
The economic uncertainty, particularly in terms of exchange rates, influences how consumers budget for holidays. With fluctuating currency values, all-inclusive packages may become a safer financial choice. If the value of the pound decreases, consumers may seek out fixed-cost holidays that provide certainty, resulting in a higher sensitivity to changes in income. This situation can further contribute to the income elasticity of demand, as consumers adjust their holiday choices based on their financial stability.