Question

which of the following is most likely to have an income elastcity of demand that is less than 1 ? A-movies

B- restaurant meals

C- airline travel

D-foreign travel

E- food

Answer 1

Income elasticity of demand (IED) measures the percentage change in demand due to the percentage change in income, ie .

The Wngel's law can also be helpful in this case. It states that as the income rises, yet the absolute expenditure on food increases, but the proportion of that expenditure decreases with respect to increase in income. Hence the answer is

C. Airline travel

E. Food

A. Movies is arguable, and varies from area to area. See the last note in the end.

Now, different products have different income elasticity. Option A - Movies can also be considered, but its elasticity decreases after a certain limit. The difference can be reasoned as below.

• As said, IED basically measures how much the quantity of commodity is consumed by change in income. Commodities are classified in its term as necessary goods, luxury goods, inferior and giffen goods and normal good. Necessary goods are commodities like food, power, etc ehich are considered quite necessary for survival, but even someone's income is too much, they can not have more food proportional to income. If a house, suppose, in a particular timeline (year, month, whatever) consumes 100 quintals of food with income $1000, they can't consume 100 times of food with increase in 100 times in income, ie they cant consume 10000 quintals of food with $100000 income. Instead, they can rise their consumption as much as 300 or no more than 500 quintals of food (ie 5 times against 100 times increment of income). That is why the IED will be no more than , since consumption increment can be no more than 400 (500 minus initial 100) and income increment is given as 99000 ($100000 minus initial $1000). Similar analogy can be applied on power consumption.
• The luxury good on the other hand, increase more proportionally than increase in income. Luxury goods are considered goods which are not necessary for survival, but they are demanded on the basis of status symbol, as their purchases will upgrade the social status of the buyer. Example ranges from Diamond necklace (read diamond-water paradox), modular kitchens, costly or showoff kind of stuffs like costly furnitures, cars, watches, etc. A low income family might not even purchase these products, but as their income increase, their demand for these products increases more as survival is not their priority now, while their social status is needed some attention due to socio cultural and easy-goind needs. IED for these goods is greater than 1. Restraunt meals, and foreign travels can be considered as luxury goods.
• The inferior and giffen goods have decrease in demand as income increase. A very general example is public transportation, as your income tends to increase, you'd take cab instead of travelling by bus.
• Normal goods are goods whose demand increase quite proportional to the increase in income. Examples are (arline) travel, clothing, budget smartphones, different organic food qualities, cars, etc. Their IED is close to 1, but not more than luxury goods and not less than necessary goods (there is no such empirical measure, only conceptual).

Note: Movie is arguably normal or luxury, but is certainly not necessary good. The problem is different people have different taste of movie, as in real world a medium income person would see more movies than a high income person, in which case its IED is definitely less than 1. But, apart from particular cases, what can be said generally is that, its IED does decreases and is less than 1, but only after a critical amount of income. Before that, it behaves more as a luxury good. Hence its IED is less than 1, but not throughout. In underdeveloped nation, movie IS luxury good, while in develped nation, it will be normal good with IED<1, but all these estimates can not be globally and theoretically generalized.