Luxury Goods Economics – How Are They Fundamentally Affected By The Economy?
Luxury Goods or Economies of scale? How to distinguish between economics of scale and economics of quality? The answer to this question may surprise some. However, economics of scale is something that is generally looked at in the context of large-scale production. For instance, how is it that grocery stores are able to run successfully? This is because there is enough supply for everyone to buy what they need and yet it is the smaller companies within the grocery store that manage to thrive.
Economics of scale on the other hand, is very different. For instance, when you go out shopping for luxury goods, such as a yacht or a private airplane, you are not running on a scale. Rather, you would be looking at the economics of thousands or even millions of units. Of course, even in this example, economics of scale is important as any increase in quantities would necessarily have an increase in value per unit.
Luxury goods such as luxury automobiles, yachts, jets, art collections, jewelry, fine wines and top brands are generally sold by retailers and businesses as shares in an ever-growing company. They are one of the fastest growing sector in global business today and are expected to expand over the next few years. But the same dynamics that affect the economies of scale within economies also affect luxury goods – if there is an increase in demand for these products, then the price will rise.
In essence, luxury goods are the result of good marketing. And the best way to make good marketing campaigns is to come up with impressive product descriptions that highlight the benefits of buying a particular good. Luxury retailers know this instinctively and use it to their advantage by highlighting all the ways in which owning and using luxury goods can add to one’s life.
So what then are the factors that affect the economics of luxury goods? In fact, economics of luxury goods are extremely similar to economics of other consumer goods. The key factor is marketing. And retailers must be able to do marketing efficiently and cost effectively to maximise returns. It makes perfect economic sense therefore to invest in research, development and new methods of marketing.
Luxury goods are normally bought on credit, so the supply is constrained. This is a major constraint on the supply because retailers have to meet demand at a premium price to retain customers. Another constraint on supply is technological change. People want new, more innovative products and some retailers have already lost a lot of market share to rivals who have been able to adopt newer technology. All these factors combine to make the supply and demand of luxury goods much more difficult to judge than other cheaper goods.
So how do the supply and demand of luxury goods affect the economy? In general, luxury goods tend to sell themselves. Demand from the public, especially affluent urbanites, adds to the overall demand for these goods. And the boom in tourism adds further demand. So the upside to the economy of luxury goods is positive for retailers.
But there are problems. Tourism is one of the most volatile elements in the global economy. Natural disasters and political unrest can also negatively affect tourism. And the relatively weak economy of Mexico, a country that is the main consumer of luxury goods, has dampened enthusiasm for many of the luxury goods on offer. These factors all add to doubts about the durability of the luxury goods consumer market in an age of falling economic standards.