Economics – Price elasticity, income elasticity and cross elasticity of demand | e-Consult

Answer: The income elasticity of demand for a foreign holiday is likely to be higher than for a domestic holiday. A foreign holiday is generally considered a luxury good, while a domestic holiday is a normal good.

Explanation:

• Normal Good vs. Luxury Good: As explained previously, a normal good has a positive YED, while a luxury good has a YED greater than 1. A foreign holiday is typically viewed as a luxury, representing discretionary spending.
• Income Sensitivity: Higher-income individuals are more likely to afford and choose foreign holidays. As income increases, the demand for foreign holidays increases disproportionately. Lower-income individuals may prioritize domestic holidays due to cost considerations.
• Alternative Spending: Higher-income individuals have more options for spending their discretionary income. They might choose to spend it on foreign holidays, while lower-income individuals have fewer alternatives.

Factors causing the difference:

• Cost: Foreign holidays are generally more expensive than domestic holidays.
• Perceived Value: Foreign holidays are often perceived as offering a higher level of experience and prestige.
• Travel Time & Convenience: The time and effort required for a foreign holiday can be a factor, but this is often outweighed by the perceived benefits.