In economics, a luxury product is a product that is bought by a large portion of the population, usually because it is desirable and not required by most people. In economics, a luxury product is generally something that is desired because of its price or because of the perceived quality of the product. In the production of luxury goods, the process of getting such products to market becomes incredibly costly. Therefore, the demand for luxury goods is high – even when there is no real requirement for them. They are perceived to be highly desirable.
Luxury goods are often bought on credit. In economics, a luxury product is a good for which demand grows faster than proportionate to income, so that increases in income due to demand, quickly outpace increases in income due to supply. Thus luxury goods like cars, yachts, and other items of luxury tend to have high elasticity of demand. High elasticity of demand means that the supply of luxury goods is falling while the demand for luxury goods is increasing. When income is increasing at a high rate, luxury goods are bought to make up for the income lost in buying them. This creates a surplus of luxury goods available for sale.
Luxury goods are always a product that is purchased with disposable income. Because they are luxury items, they are usually purchased by affluent people with disposable income. Demand for such goods increases because people want them. Luxury goods reflect the economic standing of the buyer more than the utility of the item itself. The demand for such goods reflects both the demand for luxury items, and the elasticity of demand.
Luxury goods are not necessity goods. While people buy luxury items to reflect their status in society and/or to enhance their sense of self worth, luxury items are not necessities. Most necessities are not purchased with discretionary income level in mind. Therefore, when people buy luxury items they do so because they perceive them to be necessities.
Luxury goods like clothing, food, cosmetics, furniture, cars, houses, etc. are not necessities because the majority of the population does not earn enough to purchase them on a regular basis. The difference between what the consumer pays for luxury goods and what they would pay for necessities is the degree of elasticity of the purchasing decision.
Luxury goods create demand when the consumers can no longer obtain them at a lower cost than they could from a retailer with a lower elasticity of demand. A retailer with a higher elasticity of demand will raise his prices if demand for his product falls below his minimum level. When he lowers his price, however, he must first generate sufficient income to cover the cost of his increased inventory. In other words, the retailer with a lower pareto elasticity of demand will find that most of his sales never earn back the money he has invested in purchasing his goods.
This fact leads to the paradox that luxury goods are often purchased by middle-market consumers who cannot afford them. Luxury goods such as clothing, food, and cosmetics, because they are not necessities, are available to these consumers at a relatively higher price than they would have been available to a lower-income group. When a middle-market consumer purchases of luxury goods, he is not reducing his disposable income level because he bought these goods. Instead, he is increasing it by buying more expensive goods.
Middle-market consumers buy luxury goods, because they perceive these goods to be necessities. Thus, even when a middle-market consumer’s income is insufficient to allow him to buy necessities he tends to prefer luxury goods, because to him, luxury goods provide the perception of being desirable. Because luxury goods create demand, they tend to increase the size of the market for the goods. As a result, the quality of these goods increases and their prices drop, creating both supply and demand effects in the economy.