What are Luxury Goods?

//What are Luxury Goods?
What are Luxury Goods? 2017-10-05T06:44:41+00:00

Definition: Luxury goods, also called superior goods, are products with a demand that is directly related to consumer income exponentially. In other words, when consumer income increases, they purchase more of these goods and vice versa.

What Does Luxury Goods Mean?

What is the definition of luxury good? Some people think of these luxury commodities as high end products. Sometimes this is the case, but not all high-end products fit into this category.

Luxury goods are sensitive to changes in consumer income because they have a high income elasticity of demand. This means that the demand for these products fluctuates directly with the level of consumer income. The more elastic the demand is, the greater the consumer response following a change in their income. An LG can be a normal good at different price levels.

For example, smartphones can be considered luxury goods; therefore, when consumer income rises, people usually choose to purchase a smartphone instead of a flip phone and also spend a proportionate more amount of their income on the new device.

However, for wealthy people a new smartphone is a normal good, i.e. a good whose demand increases as consumer income increases.

Let’s look at an example.

Example

Demetrius is an executive manager at a leading manufacturing company. He earns $10,000 per month, and he has a luxury car. Recently, Demetrius has seen an increase in his monthly income to $15,000. Will Demetrius buy a new luxury car?

The answer is yes. Demetrius can spend a higher percentage of his monthly income for a car, and he will do so. He will do the same for clothes, shoes, watches, and perfume. Demetrius’ income allows him to spend more on luxury goods, and as his income increases, he will be spending more money.

If Demetrius’ income rises to $25,000 per month, will he spend more money on luxury goods?

The answer is yes. The luxury goods industry is growing despite the global financial crisis, and their profit margins are expanding as a result of increased consumer spending. As consumer income rises, people are more willing to spend on luxury goods. Therefore, if Demetrius started earning $25,000 per month, he would spend a larger percentage of $25,000 to buy luxury items.

Define Luxury Goods: A luxury good is a commodity that consumers demand more disproportionately as their incomes increase.