What Is a Luxury Item?
A luxury item is not necessary to live, but it is deemed highly desirable within a culture or society. Demand for luxury goods increases when a person's wealth or income increases. Typically, the greater the percentage increase in income, the greater the percentage increase in luxury item purchases.
Since luxury goods are expensive, wealthy people are disproportionate consumers of luxury goods. Those who are not wealthy don't usually buy luxury goods since a greater percentage of their income goes to need-based expenses in order to live. Luxury goods can be considered conspicuous consumption, which is the purchase of goods mainly or solely to show off one's wealth.
A luxury item is not necessary to live, but it is deemed highly desirable within a culture or society.
Luxury items tend to be sensitive to a person's income or wealth, meaning that as wealth rises, so do purchases of luxury items.
Luxury items can include high-end automobiles and yachts but also services, such as full-time or live-in chefs and housekeepers.
Understanding Luxury Items
Luxury items tend to be sensitive to a person's income or wealth, meaning that as wealth rises, so do purchases of luxury items. As a result, luxury items are considered to show positive income elasticity of demand, which is a measure of how responsive the demand is for a good to a change in a person's income. Conversely, if there is a decline in income, demand for luxury items will decline.
For example, demand for large, high-definition (HD) TVs would likely increase as income rises since people have the extra income to splurge on a big TV. However, if a recession occurs, which is negative economic growth, causing people to lose their job or experience less income from a lower-paying job, the demand for HD TVs would likely decline. As a result, HD TVs would be considered a luxury item.
Luxury items are the opposite of necessity goods or need expenses, which are the goods that people buy regardless of their income level or wealth. Food, water, and utilities used to live in a house or an apartment would likely be considered necessity goods for most people.
Luxury items can also refer to services, such as full-time or live-in chefs and housekeepers. Some financial services can also be considered luxury services by default because persons in lower-income brackets generally do not use them. Luxury goods also have special luxury packaging to differentiate the products from mainstream products of the same category. Of course, the definition of a luxury item is somewhat subjective, depending on a person's financial circumstances. For example, one might consider a car a luxury item while another might consider a necessity.
Luxury Item vs. Inferior Good
An inferior good is a good that experiences less demand as a person's income increases. As a result, it has a negative elasticity of demand. For example, cheap, store-brand coffee would likely see an increase in demand when peoples' income is low. However, when their income increases, the demand for store-brand coffee would decline as people opt for the more expensive, higher-quality coffee. As a result, the store brand coffee would be an inferior good.
Luxury items are not inferior goods; instead, they're the goods that people opt to buy when their income increases to replace inferior goods.
A luxury good may become an inferior good at different income levels. For example, if a wealthy person gets wealthy enough, they may stop buying increasing numbers of luxury cars in order to start collecting airplanes or yachts–because, at the higher income levels, the luxury car would become an inferior good.
Although the designation of an item as a luxury item doesn't necessarily translate to high quality, such goods are often considered to be on the highest end of the market in terms of quality and price.
Some luxury products purport to be examples of Veblen goods, which are goods that see their demand rise because they're considered status symbols. In other words, as the price of the good increases, so too does demand, as people perceive, it has a higher value. As a result, Veblen goods have a positive price elasticity of demand, which measures the change in demand as a result of a change in price. For example, raising the price on a bottle of perfume can increase its perceived value, which can cause sales to increase, rather than decrease.
Certain luxury items may be subjected to a specific tax or luxury tax. Large or expensive recreational boats or automobiles can be subject to a federal tax. For example, the U.S. levied a luxury tax on certain automobiles in the 1990s but ended the tax in 2003. Luxury taxes are considered progressive because they typically only affect people with high net wealth or income.
Examples of Luxury Items
Although luxury items can be different from one person to another, the following items are considered luxury items in an economy:
Haute couture clothing
Accessories, such as jewelry and high-end watches
A high-end automobile, such as a sports car
Homes and estates