A Level Economics AQA Practice Exam

How would a significant decrease in consumer income generally affect demand for luxury goods?

1. Demand increases for luxury goods

2. Demand remains stable for luxury goods

3. Demand decreases for luxury goods

4. Demand is unpredictable in such scenarios

The correct answer is: Demand decreases for luxury goods

A significant decrease in consumer income typically leads to a decline in demand for luxury goods. Luxury goods are considered non-essential items that consumers tend to purchase when they have a higher disposable income. When consumer income falls, individuals prioritize spending on essential goods and services, often cutting back on expenditures on luxury items to manage their budgets more sustainably. The relationship between income and demand for luxury goods is grounded in the concept of normal goods. Luxury items are categorized as normal goods, meaning that their demand decreases when income decreases. As consumers adjust their spending habits during economic downturns or when faced with financial difficulties, they tend to forgo luxury purchases in favor of necessities or more affordable alternatives. This behavior reflects a rational response to reduced income levels, ultimately resulting in decreased demand for luxury goods.