Luxury Item

What is a Luxury Item?

Luxury is considered as something that provides added value to everyday life — in turn, luxury items exude a feel of prosperity and class. While these aren’t necessary for our lives and aren’t considered a basic need, these are items deemed to be highly desirable in a culture or a society.

Moreover, the demand for luxury goods can get higher as a person’s income increases. In other words, the higher a person’s income, the more luxurious they may seek to have their life.

The word “Luxury” originates from the word luxuria, which is Latin for excess, abundance, and exuberance. When it comes to economics, a luxury item (also known as a luxury good) is considered to be a good in which the demand increases as a person’s income rises.

As a result, the expenses on such goods become higher in proportion to their overall spending.

Luxury goods are generally expensive, which is why they are mostly bought by rich people. In general, those who aren’t rich won’t be able to purchase luxury goods due to their high costs.

A typical consumer’s income will first be spent on needs rather than wants for them to survive on a day-to-day basis.

Detailed Look at Luxury Items in Personal Finance

The definition of luxury items can be condensed into goods considered to be elite among society, and are things that consumers tend to buy as their income and wealth increases.

These can come in the form of designer watches or handbags — it can also refer to services such as a golf club membership or a chauffeur. Moreover, the demand for luxury items is not similar to those of inferior or normal goods.

Unlike normal goods which are meant to provide for practical needs, purchasing luxury items are usually regarded as conspicuous consumption or a way to show off prestige and social standing.

The concept of luxury has also evolved through time — what might be considered a luxury item for one person could be a necessity for someone else. Furthermore, the definition of luxury can vary among cultures, incomes, and by periods.

As mentioned, luxury items can vary for different people, and they also come in all kinds of shapes and sizes. While some people may consider a laptop a luxury item, others will deem it as a necessity. Here are a few examples of goods and services that make it to the luxury item list:

• Designer shoes and clothing
• High-end watches and fine jewelry
• Private jets
• Yachts
• Luxury cars
• Expensive real estate
• Landscaping services
• Country club memberships
• Spa services

There are many ways to save money for luxury items, detailed here.

Luxury Items Versus Inferior Goods

Inferior goods are referred to as goods that decrease in demand as a person’s income becomes higher. Because of this, inferior goods have a negative elasticity of demand. For instance, take a cheap, store-brand coffee — when people’s income is low, it will likely get an increase in demand.

However, as soon as people’s income rises, the demand for the same coffee brand will decline because people will look for higher-quality, more expensive coffee. In the end, the store-brand coffee is known to be an inferior good.

Luxury items aren’t considered inferior goods and have their own identity — most luxurious brands will belong to a brand name.

Instead, these are goods that people will choose to buy once their income increases and will often be the items that replace inferior goods. In some cases, however, a luxury good can become an inferior good when income levels vary.

For example, if a rich person becomes even richer, they could stop buying and collecting luxury cars. Instead, they may opt to start buying and collecting yachts or airplanes.

Because of their higher incomes, there is a higher demand for even bigger luxurious items. If this is the case, even a luxury car can turn into an inferior good.

Luxury Items versus Normal Goods

Like luxury items, normal goods refer to products that increase in demand as the population’s income grows. The difference between the two, however, is that the demand for luxury goods will grow faster compared to normal goods as income increases.

Normal goods refer to necessities such as food, clothing, and shelter, where the demand generally increases as a person’s income increases but not to the same extent as luxury goods.

However, a normal good can also become an inferior good depending on income levels. For instance, when a consumer experiences a significant increase in their income, they may purchase a luxury car instead of an economy car. This effectively turns the economy car into an inferior good.

In this example, the only difference between the luxury item and the normal good is the consumer’s income level. The luxury item is considered to be of higher quality, and as such, can turn a normal good into an inferior good.

What is a Veblen Good?

The term Veblen Good was named after Norwegian-American economist and sociologist, Thorstein Bunde Veblen (1857-1929). Famous for being a critic of capitalism, he identified conspicuous consumption to be a status-seeking trait in his 1899 book, The Theory of the Leisure Class.

Today, we know Veblen goods to be luxuries that don’t follow the laws of supply and demand.

A Veblen good’s demands positively correlate with price, which means that the more expensive they are, the more they’ll be in demand. However, the cheaper they become, the fewer people want them. A few examples of Veblen goods are:

• Wines
• Jewelry
• Designer handbags
• Some brands of watches
• Luxury cars

While their expensive prices can make them desirable status symbols, they are also vulnerable to losing their state of luxury. In other words, the consumption of Veblen goods in the economy is just a part of the effect it has on people — they’re only desired because they’re overpriced.