a) Income elasticity of demand measures responsiveness to income changes.
b) Income elasticity of demand for Chinese foreign holidays from 2010 to 2015 is approximately 1.66.
c) Overseas holidays in China are a normal good.
d) Availability of substitutes and necessity affect income elasticity.
e) Valuable for targeted marketing and product development in the Chinese tourism market.
a) Define the term income elasticity of demand.
Income elasticity of demand is a measure of how responsive the demand for a good or service is to a change in income. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income.
b) Calculate the income elasticity of demand for foreign holidays in China between 2010 and 2015.
According to Figure 2, the number of Chinese people crossing borders for holidays increased from 57.4 million in 2010 to 135 million in 2015. This is an increase of 135%.
According to the World Bank, China's GDP grew from US$6100.62 in 2010 to US$11,064.66 in 2015. This is an increase of 81.4%.
Therefore, the income elasticity of demand for foreign holidays in China between 2010 and 2015 is:
135% / 81.4% = 1.66
This means that for every 1% increase in income, there was a 1.66% increase in the demand for foreign holidays.
c) Explain why an overseas holiday to China is classified as a normal good.
A normal good is a good for which the demand increases when income increases. This is because people can afford to buy more normal goods as their income increases.
Foreign holidays are a normal good because the demand for foreign holidays has increased significantly as China's economy has grown. This is because people have more disposable income to spend on travel as their incomes increase.
d) Analyse two factors that might influence income elasticity of demand.
Two factors that might influence income elasticity of demand are:
* The availability of substitutes: If there are many substitutes for a good, then the income elasticity of demand for that good will be lower. This is because people can switch to substitutes if the price of the original good rises.
* The necessity of the good: If a good is a necessity, then the income elasticity of demand for that good will be lower. This is because people will still need to buy the good even if their income decreases.
e) Assess how useful income elasticity might be for a business selling holidays to Chinese tourists.
Income elasticity of demand can be a useful tool for businesses selling holidays to Chinese tourists. By understanding the income elasticity of demand for foreign holidays, businesses can better target their marketing efforts and develop products and services that are tailored to the needs of Chinese consumers.
For example, a business that knows that the income elasticity of demand for foreign holidays is high might focus on marketing its holidays to affluent Chinese consumers. The business might also develop luxury holiday packages that cater to the tastes of this demographic.
Income elasticity of demand can also be used to assess the potential demand for new products or services. For example, a business that is considering offering a new type of holiday package to Chinese consumers could use income elasticity of demand to estimate the potential demand for the package.
Overall, income elasticity of demand is a valuable tool for businesses that are trying to understand and predict the demand for their products or services.