Question

Based on your knowledge on income elasticity of demand, normal good and inferior good, discuss the demand for luxury cars and bread (khubs) before February 2020 and after February 2020. Given today’s economic situation, would you advice the government to build more luxury car manufacturing plants or build green houses to produce food?

Answer 1

Income elasticity refers to the responsiveness of demand for a good by a consumer due to change in income.

Comparing luxury goods and normal goods like bread which is a necessity, luxury goods tend to have high income elasticity of demand while the necessary goods have inelastic income demand.

The COVID-19 outbreak in US led to a drastic effect on the US economy. Manufacturing services have been shut, people are in lockdown and working from home. Since the disease is dangerous and can be caught easily, people are sitting at home and working from home and consuming basic necessities like food, milk, bread etc.

Incomes of people have fallen.

As a result of this, demand for luxury goods has fallen dramatically while that of necessary goods like bread has increased.

Thus, after Feb 2020 when the COVID-19 outbreak took place in US, it is advisable for government to build green houses to produce food and not focus on luxury car manufacturing because after Feb 2020, demand for food has increased drastically while that of luxury cars has decreased.