Necessity vs Luxury

Definition

Necessity and luxury refer to two distinct categories of goods that consumers may purchase. Necessities are essential items that individuals need for basic functioning and survival, such as food, water, and shelter, while luxuries are non-essential items that enhance quality of life but are not required for survival, like designer clothing or vacations. This distinction significantly influences consumer behavior, especially in relation to how demand reacts to changes in price.

5 Must Know Facts For Your Next Test

1. Necessities tend to have inelastic demand, meaning that consumers will continue to purchase them even if prices rise.
2. Luxuries usually have elastic demand, so if prices increase significantly, consumers may cut back on purchases or look for alternatives.
3. During economic downturns, consumers often prioritize necessities over luxuries, impacting overall sales and market trends.
4. The classification of a good as a necessity or luxury can change based on individual preferences and societal changes; for example, internet access has become a necessity for many in modern life.
5. Understanding the necessity vs luxury distinction is crucial for businesses when setting prices and developing marketing strategies.

Review Questions

• How does the distinction between necessities and luxuries influence the elasticity of demand?
  • The distinction between necessities and luxuries directly affects the elasticity of demand because necessities typically have inelastic demand, meaning that consumers will continue purchasing them regardless of price changes. In contrast, luxuries often exhibit elastic demand, where price increases can lead to significant decreases in quantity demanded. This understanding is essential for businesses to predict consumer behavior and set appropriate pricing strategies.
• Evaluate how consumer behavior might shift during an economic recession concerning necessities and luxuries.
  • During an economic recession, consumer behavior generally shifts towards prioritizing necessities over luxuries. As disposable incomes decrease, people tend to reduce spending on non-essential items, leading to a decline in luxury goods sales while maintaining or even increasing spending on necessities. This shift can create challenges for businesses that rely heavily on luxury markets, pushing them to adapt their strategies to meet changing consumer needs.
• Analyze the impact of technology advancements on the classification of goods as necessities or luxuries over time.
  • Technology advancements can significantly alter the classification of goods as necessities or luxuries. For instance, goods like smartphones and internet access were once considered luxuries but have increasingly become viewed as necessities in today's digital age. As society evolves and new technologies emerge, what is deemed essential for daily functioning can change dramatically. This shift affects market dynamics and consumer behavior, leading businesses to adapt their offerings accordingly.

Related terms

Elasticity of Demand:

Elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price, with necessities typically exhibiting inelastic demand and luxuries showing elastic demand.

Inferior Goods:

Inferior goods are those for which demand increases as consumer income decreases, contrasting with normal goods, which see increased demand as income rises.

Substitutes:

Substitutes are alternative goods that can replace each other; the availability of substitutes can affect the elasticity of demand for both necessities and luxuries.