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ACCA Applied Knowledge · Business and Technology · Macroeconomic factors

A manufacturer of luxury yachts finds that its sales fall sharply during a downturn, far more than sales of basic groceries. Which description best explains this?

Yacht demand is highly income elastic, so sales are cyclical. When incomes fall in a downturn, spending on luxuries drops by more than the fall in income, whereas necessities such as groceries are income inelastic and their demand stays relatively stable.

  1. ADemand for yachts is highly income elastic, so it is cyclicalCorrect
  2. BDemand for yachts is income inelastic, so it is counter-cyclical
  3. CDemand for yachts is price inelastic, so it is stable
  4. DYachts are inferior goods whose demand rises when incomes fall

Explanation

Luxury goods have a high income elasticity of demand, so a fall in incomes during a downturn leads to a more than proportionate fall in demand, making sales cyclical. Groceries are income inelastic and so more stable. Inferior goods would see demand rise, which is not the case here.

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