In a survey of caterers and event planners, nearly half of them said that they were seeing declines in wedding spending in response to the economic slowdown; \(12 \%\) even reported wedding cancellations because of financial concerns. Source: \(T\) ime, June 2,2008 a. Based upon this news clip, are wedding events a normal good or an inferior good? Explain. b. Are wedding events more a necessity or a luxury? Would the income elasticity of demand be greater than \(1,\) less than \(1,\) or equal to \(1 ?\) Explain.

Understanding normal goods is key to solving the problem about wedding events and their economic impact. Normal goods are items whose demand increases when consumer incomes rise and decreases when consumer incomes fall. In the context of the exercise, the survey noted that spending on wedding events declined as the economy slowed down. This observation shows that wedding events behave as normal goods.

• When people have more money, they are willing to spend more on weddings.
• Conversely, during economic downturns, they cut back on wedding-related expenditure.

Let's consider an example. Imagine you get a raise at your job. You might plan a more elaborate wedding, or hire a more prominent venue. This is because you have more money to spend, which is a characteristic of normal goods.

Luxury items are goods that are not essential but are highly desired by those who can afford them. Unlike necessities, luxury items see a greater change in demand when income levels change.

Wedding events are a prime example of luxury items. They tend to be lavish and encompass additional expenses like fancy venues, designer dresses, and high-end catering. They go beyond just getting married; they reflect a desire for celebration and social status, particularly relevant when disposable incomes are higher.

• Think about high-cost decoration and entertainment options that are often part of luxury weddings.
• Unlike basic goods, luxury items might be completely forgone in tighter financial situations.
• Customization and uniqueness also play a huge role in the demand for luxury wedding events.

This unnecessary, yet highly desirable nature labels them as luxury goods. So, wedding events fit well into this category.

Income Elasticity of Demand (IED) indicates how sensitive the demand for a good is to changes in income. It's calculated as the percentage change in the quantity demanded divided by the percentage change in income.

For wedding events, due to their luxury nature, the income elasticity of demand is likely greater than 1. This means that even small increases in income lead to significant increases in spending on wedding events. Here’s why:

• When incomes rise, people are not just increasing their basic spending; they splurge more on extras and luxuries such as weddings.
• Similarly, a drop in incomes means they will cut significantly on these lavish expenses first before altering their spending on essentials.

Let's illustrate with numbers: if the income elasticity of demand is 1.5 and your income increases by 10%, the demand for wedding events might increase by 15%. This responsiveness confirms that wedding events have a high IED, aligning them with luxury products.