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Since luxury goods are expensive, wealthy people are disproportionate consumers of
luxury goods. Those who are not wealthy don't usually buy luxury goods since a greater
percentage of their income goes to need-based expenses in order to live.
Note: a luxury good is also a normal good, but a normal good isn’t
necessarily a luxury good.
For example, demand for large, high-definition (HD) TVs would likely increase as
income rises since people have the extra income to splurge on a big TV.
However, if a recession occurs, which is negative economic growth, causing
people to lose their job or experience less income from a lower-paying job, the
demand for HD TVs would likely decline. As a result, HD TVs would be
considered a luxury item.
Luxury items are the opposite of necessity goods or need expenses, which are
the goods that people buy regardless of their income level or wealth. Food,
water, and utilities used to live in a house or an apartment would likely be
considered necessity goods for most people.
Luxury items can also refer to services, such as full-time or live-in chefs and
housekeepers. Some financial services can also be considered luxury services
by default because persons in lower-income brackets generally do not use
them. Luxury goods also have special luxury packaging to differentiate the
products from mainstream products of the same category. Of course, the
definition of a luxury item is somewhat subjective, depending on a person's
financial circumstances. For example, one might consider a car a luxury item
while another might consider a necessity.
These goods are those goods whose prices do not follow the typical economic
laws of supply and demand. In most cases, when something becomes more
expensive, demand for it declines. The opposite occurs with Veblen Goods –
when their prices rise, people want more of them – demand grows.
Consumers buy these types of products mainly to enhance their status.
LAW OF DEMAND
The law of demand is one of the most fundamental concepts in economics. It
works with the law of supply to explain how market economies allocate resources
and determine the prices of goods and services that we observe in everyday
transactions.
The law of demand states that quantity purchased varies inversely with price. In
other words, the higher the price, the lower the quantity demanded. This occurs
because of diminishing marginal utility.
Necessities versus Luxuries Necessities tend to have inelastic demands, whereas luxuries have
elastic demands. When the price of a doctor’s visit rises, people do not dramatically reduce the
number of times they go to the doctor, although they elasticity a measure of the responsiveness
of quantity demanded or quantity supplied to a change in one of its determinants price elasticity
of demand a measure of how much the quantity demanded of a good responds to a change in the
price of that good, computed as the percentage change in quantity demanded divided by the
percentage change in price might go somewhat less often. By contrast, when the price of
sailboats rises, the quantity of sailboats demanded falls substantially. The reason is that most
people view doctor visits as a necessity and sailboats as a luxury. Whether a good is a necessity
or a luxury depends not on the intrinsic properties of the good but on the preferences of the
buyer. For avid sailors with little concern about their health, sailboats might be a necessity with
inelastic demand and doctor visits a luxury with elastic demand.
Income elasticity of demand is measured by the response of the demand for change in income.
As a rule, income growth generates an increase in demand, but there are goods for which, on the
contrary, means that with income growth decreases demand. Such goods are subordinate, for
which there are slightly more expensive but better quality substitutes. As for luxury goods, the
income elasticity of demand is always greater than 1, it means that the relative change in demand
is usually greater than the relative change in income, which in practice means that the demand
for luxury goods is quite flexible.