This paper gives an in-depth analysis of price elasticity of luxury goods. In doing this, a lot of focus will be put on demand and supply of commodities in the market. This will help in explaining why these kinds of goods always have a lactic response to changes in their prices and income of the potential buyers. The analysis will be important in proving why this class of commodities always behave in a different manner from the rest of products in any given market situation.
To begin with, the term demand, as used in Economics, simply refers to the willingness and ability of an individual to buy goods and services. Meaning, if a person is willing, but not able to purchase a commodity, then there is no demand for it. Since the major goal of any business is to make profit, businessmen will only supply their commodities if there is a good demand for them. As a result, the quality of their supply will greatly rely on the buyers’ reception. In other words, the higher the demand, the higher the supply will be because the suppliers will not be afraid of accruing any losses from overstocking (O’Sullivan, A. & Sheffrin, S., 2005).
Factors Affecting Demand
Some of the major factors affecting the demand of commodities in the market include the following:
According to the law of demand, the quantity of commodities demanded is inversely proportional to the prices of the same commodities. This is called negative elasticity and is applicable to most of the necessity and other products. An increase in price of a commodity reduces its demand (Perloff, J., 2001). This is because; the change in price will bring more expenses to buyers who many then opt to forgo that commodity or acquire substitutes from other competing suppliers.
The quantity of goods demanded is directly proportional to the level of income of the buyers. Their consumption increases with an increase in their salaries. The additional income acquired can be spent on buying more goods than they used to do before. As a result, the suppliers will benefit from high stock turn over and subsequently increase their gains.
- Taste, fashions and preference
The other factor determining consumer behavior is differences in their tastes, preferences and fashions. Because of personal uniqueness, everyone has their own likes and dislikes. This makes each of them have their own way of evaluating the most appealing commodities. Hence, the manufacturers should know that they are serving diverse personalities (Vogel, H., 2001). They must provide lots of uniqueness in their commodities in order to win the confidence of their clients.
- Government interventions
The intervention of the government is another important factor controlling the buyers’ response towards the commodities sold in the country. Even if the market is fully left in the ands of the private sector, it is justified for the state to be incorporated. However, interventions like provision of subsidies will directly influence demand of commodities in the market. For instance, tax reductions and provision of subsidies will lead to the reduction of prices. This will motivate consumers to increase their demands of such products (Ruffin, R.J. & Gregory, P. R. (2008).
Luxury goods refer to the commodities that are not essential in life, but are acquired in order life more pleasurable and comfortable. They are usually more expensive as compared to the necessities. Therefore, they can only be bought by rich people. Some of these commodities include expensive car brands such as Ferrari, Spyker, Aston Martin, Lamborghini and Rolls-Royce; latest fashion brands including Chanel, Fendi, Ferragamo, Louis Vuitton and Christian Dior and jewelries.
As already highlighted, these commodities do not adhere to the laws of demand. In fact, unlike others, they are lactic (Mankiw, N. G., 1998). In other words, their demand does not show a proportionate negative change to the changes in prices. Furthermore, their demand increases with an increase in consumers’ income. This can be explained s follows:
In simple terms, YED is Income Elasticity Demand. According to this theory, the demand of inferior commodities decline with increase in income of the consumers. In my opinion, I can Abraham Maslow’s Need Hierarchy theory to explain this concept. According to Maslow, human wants are in an increasing order right from the most basic to the most luxurious. Immediately the ones at the base of the hierarchy are met, there is always a constant urge to acquire the rest (Goodwin, N. et al., 2007).
However, luxury goods do not obey the law of YED. Unlike other commodities, their demand increases with an increase in income. I think this happens because; as people get richer, they need to get more superior products to reflect the change in their status. For instance, a youth who was wearing Calvin Klein T-Shirts will no longer use the same if they get a job. Instead, they will shift to the most expensive designs like BCBG Max Azria.
Price elasticity of demand (PED)
In Economics, the term elasticity is used to denote the measure of responsiveness between two or more variables. In this regard, PED refers to the measure of the percentage of the amount f quantity demanded over the percentage change in price of that commodity. PED can be elastic or inelastic depending on the type of commodity. In this case, an elastic price shows that the quantity demanded is highly responsive to changes in prices and vice versa (Ferguson, C., 2009).
Luxury goods are more price elastic than the necessity commodities. Meaning, their demand is not greatly influenced by changes in prices. Consumers can still buy such goods whether their prices are lowered, constant or increased. This is because they are not bought as essential products, but only bought for prestige. Their work is to make life more comfortable and pleasurable to the users. Therefore, they do not care whether their prices change. What they need is to acquire them. For instance, a person willing to buy golden jewelries will not mind about its cost. They will buy them whether they are expensive or cheaper. Their main objective is to ensure that they are getting such commodities (Duetsch, Larry L., 2003). This is because, by getting them, they achieve personal fulfillment, besides holding a special position in society.
Cross Elasticity of Demand (XED)
XED is an Economics terminology which refers to the degree of response by the quantity of the commodity demanded due to price changes of others in the market. A typical market has a variety of goods which are either related as substitutes or complements (Frank, R., 2000). It is their closeness which determines the type of change they experience. Positive XED is realized when these commodities are substitutes while a negative infinity signifies compliment goods.
The quantity of luxury goods demanded may not greatly change as a result of changes in prices of other commodities. This is because the buyers always focus on single products when making their choices. They do no focus on the prices of these commodities because it is not a factor determining their choice. For example, a change in prices of the Prado Cars will not greatly affect the quantity of Honda demanded. Even if they serve the same purpose, the consumers will make independent decisions without such influences (Chaloupka, F. J. et al., 2002).
I would like to conclude by agreeing with the fact that luxury goods are exclusively meant for pleasure. They are not necessary in life and can be done without. Because of this, their demand is not greatly dependent on changes in price since they can be bought at any time. However, I would like to appeal to the clientele that they should focus on the necessities instead of engaging in such spendthrift behaviors. By doing this, they will save a lot and develop themselves economically.