Luxury goods are types of goods whose demand is higher than the increase in consumer income. Consumers ask for more when their income rises.
Although they don’t always have a high-quality connotation, they are often considered to be at the top in terms of quality and price. Examples are luxury cars, fashion clothes, yachts, watches, and jewelry.
Do you know what the most expensive items in the world are?
Citing cheatsheet.com, the following is the list:
- Graff Diamonds Hallucination watch USD55 million
- 1963 Ferrari 250 GTO USD70 million
- Bluefin tuna, USD3.1 million
- Antilia, Mumbai USD2 billion
- Manhattan parking spot USD1 million
- Leonardo da Vinci’s Salvator Mundi USD450 million
- The domain ‘CarInsurance.com’ USD49.7 million
- Neiman Marcus Limited Edition Fighter USD11 million
- Wittelsbach-Graaf diamond USD80 million
- Heintzman Crystal Piano USD3.22 million
- Aztec Passion, Platinum Liquor Bottle by Tequila Ley USD3.5 million
- “Jumbo” T206 Honus Wagner baseball card USD3.12 million
- iPhone 4 Diamond Rose Edition by Stuart Hughes USD8 million
- Alberto Giacometti’s The Man with the Finger sculpture USD141.3 million
- History Supreme Yacht USD4.5 billion
What is the income elasticity of a luxury good??
In economics, luxury goods have a positive income elasticity of more than 1. I mean, when consumer income increases by 5%, the quantity of demand for luxury goods rises by more than 5%.
What is income elasticity? Let’s discuss it briefly.
Income elasticity measures the responsiveness of the demand quantity of a product when consumer income changes. You can calculate it by dividing the percentage change in the demand quantity by the percentage change in income.
Income elasticity of demand (IE) = % Change in the demand quantity of product /% Change in the consumer’s income
Economists divide goods into two groups based on signs of income elasticity. When an item has a positive income elasticity, it is a normal good. Whereas, when the elasticity is negative, it is an inferior good.
Positive income elasticity shows you that the demand quantity of normal goods increases as consumer income rises. How significant is the increase?
Economists then divide them into two, necessities and luxury goods.
- Necessities have an elasticity of more than zero but less than one (0 <IE <1). Their demand is inelastic. An increase in consumer income of 5% will only increase the quantity of demand of less than 5%.
- Luxury goods have more than one income elasticity (IE> 1). Their demand is elastic in income because when consumer income rises by 5%, the demand quantity increases by more than 5%.
What makes a product luxury?
Luxury goods are positional goods. I mean, their purchasing or ownership signals a position or status in society. Not everyone can buy them. Thus, if you purchase them, you are rich.
Goods are luxurious because:
- Expensive. Only a few individuals can afford them.
- Have a better quality. Products are made from high-quality materials, and they last for a long time.
- Rare and unique. Goods are limited in availability and sometimes only one in the world. As the supply-demand concept says, more limited supply than demand makes their prices exceptionally high.
- Aesthetically designed. The design will be appealing the first time you see it. It also communicates the uniqueness of an item.
But, once again. Like the category of various other items. What you call a “luxury” or “necessities ” depends on your income level. You might say a car is a necessity. But, for the poor, it is a luxury good.
I mean, not everyone agrees that certain items are considered luxury items. Let’s take a millionaire who has become a billionaire. With higher wealth, he might stop buying luxury cars. He prefers private planes or cruises. So, with a higher level of wealth, luxury cars will become necessities.
Are luxury goods Veblen goods?
Some luxury products are examples of Veblen goods. What are Veblen goods?
Veblen goods are types of luxuries in which price increases further increase the utility (satisfaction) that consumers get. As a result, consumers increasingly desire them when their prices go up.