What Makes Luxury Goods So Expensive?
What is it that makes some things so much more desirable than other things? Well, in economics, a luxury commodity is something that is valuable and have a high relative value, usually above average relative value, and is therefore of a more ideal type. In economics, a luxury commodity is generally something that is desired more because of its value than its average relative value, so that increases in expenditure on the good generally become a higher proportion of overall expenditure. In other words, the more you spend, the more you want. Luxury goods are sought after and prized by most of us, but how do they come to be so highly priced?
Luxury goods are usually very high-priced because of three factors: high demand, high income elasticity of demand, and high relative price elasticity. High demand is a result of the relatively limited supply of the good; demand tends to grow as income goes up. High income elasticity is the other two factors, since increased expenditure on goods stimulates investment and consumption, both of which tend to increase income. Finally, since luxury goods typically involve avoidance of utility loss, utility pricing has been taken into account in determining pricing.
So why do luxury goods cost so much more? The main reason is that demand for them is relatively low, allowing prices to be set at a premium – the elasticity of demand being lower. Also, since luxury goods are desirable because of their value, there is a tendency for demand to drop below the elasticity of supply – in short, that goods become rarer until eventually they become virtually impossible to find. But in the long run, it should be noted that the increased income from these commodities will reduce income elasticity and so the cost of buying them in the first place.