Which category of goods is least affected by income changes during the business cycle?

• A. Non-essentials
• B. Necessities
• C. Public sector goods (healthcare)
• D. Capital goods

Answer: (B)

The main idea here is how demand responds to changes in income, known as income elasticity of demand. Necessities have very low income elasticity, meaning people must buy them even when their incomes fall or rise, so the quantity demanded changes only slightly with income. Non-essentials are discretionary; when incomes increase, people buy more of them, and when incomes drop, they cut back, causing bigger fluctuations in demand. Capital goods are tied to business investment and economic outlook, so their demand swings with the business cycle as firms postpone or accelerate purchases. Public sector goods like healthcare are provided by the government and may be less sensitive to private income, but the category that shows the smallest change in demand as income shifts is necessities.