income elasticity of demand

Question 1

normal goods

Answer 1

positive income elasticity of demand - as income rises, more is demanded

Question 2

luxury goods and services

Answer 2

have an income elasticity of demand of more than +1 - as income rises, they buy lots more of these products e.g. foreign holidays

Question 3

inferior goods

Answer 3

negative income elasticity of demand - as income rises, demand falls

Question 4

2 factors influencing income elasticity of demand

Answer 4

• the degree of attractiveness of the product to the customer
• how large a proportion of household income is spent on the item

Question 5

what can a luxury company choose to do if their main product is a highly income-elastic?

Answer 5

• focus on new product development on a cheaper brand
• keep an extra strong cash-flow position to cope with downturns in sales