key term - Luxury

Definition

Luxury refers to goods and services that are not necessary for basic survival but are considered highly desirable, often associated with a high level of comfort, quality, and exclusivity. The concept of luxury is particularly relevant in the context of price elasticity of demand and pricing strategies.

5 Must Know Facts For Your Next Test

1. Luxury goods typically have a high price elasticity of demand, meaning that a small change in price can lead to a relatively large change in the quantity demanded.
2. Luxury goods are often considered non-essential or discretionary purchases, and consumers are willing to pay a premium for the perceived quality, status, and exclusivity associated with these products.
3. The price elasticity of demand for luxury goods is generally lower (more inelastic) than for necessity goods, as consumers are less sensitive to price changes for luxury items.
4. Pricing strategies for luxury goods often involve premium pricing, where the price is set high to maintain the perception of exclusivity and prestige, even if it means lower sales volumes.
5. Luxury brands often focus on creating a strong brand image and cultivating a sense of exclusivity, which can allow them to charge higher prices and maintain a loyal customer base.

Review Questions

• Explain how the price elasticity of demand for luxury goods differs from that of necessity goods.
  • The price elasticity of demand for luxury goods is generally lower (more inelastic) compared to necessity goods. This means that a change in the price of a luxury good will result in a smaller change in the quantity demanded, as consumers are less sensitive to price changes for these products. Luxury goods are often seen as non-essential purchases, and consumers are willing to pay a premium for the perceived quality, status, and exclusivity associated with them. In contrast, necessity goods have a higher price elasticity of demand, as consumers are more sensitive to price changes for these essential items.
• Describe how luxury brands can use pricing strategies to maintain their perceived exclusivity and prestige.
  • Luxury brands often employ premium pricing strategies to maintain the perception of exclusivity and prestige associated with their products. By setting prices high, even if it means lower sales volumes, luxury brands can cultivate a sense of scarcity and desirability. This pricing approach aligns with the concept of Veblen goods, where the demand for a product increases as the price rises due to the perceived higher status and exclusivity. Additionally, luxury brands focus on creating a strong brand image and cultivating a loyal customer base, which allows them to charge higher prices and maintain their position in the market.
• Analyze how the concept of conspicuous consumption relates to the demand for luxury goods and the pricing strategies used by luxury brands.
  • The concept of conspicuous consumption, where individuals purchase and display expensive or exclusive goods to demonstrate wealth and social status, is closely linked to the demand for luxury goods. Consumers who engage in conspicuous consumption are often willing to pay premium prices for luxury items, as the high price itself contributes to the perceived exclusivity and prestige associated with the product. Luxury brands leverage this behavior by implementing pricing strategies that maintain the perception of scarcity and exclusivity, even if it means lower sales volumes. By charging high prices and cultivating a strong brand image, luxury brands can cater to the desires of consumers seeking to engage in conspicuous consumption and signal their social status through the acquisition of these desirable goods.

Related terms

Veblen Goods: Veblen goods are a type of luxury good for which the demand increases as the price increases, due to the perceived higher status and exclusivity associated with more expensive versions of the product.

Conspicuous Consumption: Conspicuous consumption is the act of purchasing and displaying expensive or exclusive goods and services to demonstrate wealth, social status, and prestige.

Inelastic Demand:

Inelastic demand refers to a situation where the quantity demanded of a good or service changes less than proportionally to a change in its price, which is often the case for luxury goods.