The concept of luxury is not an easy one to define. It can be relative, local, cultural, and even geographic. But there are some basic dimensions on which luxury can be measured. In economics, a luxury commodity is usually a good whose purchase reduces in price as increased income increases, so that expenses on the item get a greater percentage of total income. Economists call this a liquid luxury good.
In business terms, luxury goods are those intangible assets that create a positive cash flow and/or enhance competitive advantage. A classic example of this is the brand name associated with a product. A brand can represent a reputation, trust, or even loyalty that customers have for a particular business. If a business owner buys a premium brand name and markets it successfully, he can increase his profits by charging higher prices for his products and services. This raises the income of the business, but it also increases his expenses, because his profits are tied directly to his investment level.
Thus, income elasticity of luxury goods is determined by the demand-supply relationship at the point of purchase. Higher priced items command higher prices from customers, reducing their purchasing power. Demand-supply relations determine how much each unit of a good can be bought to meet individual demand, causing businesses to have to invest large amounts of capital to pay for these items. The existence and duration of a supply curve determine the income elasticity of luxury goods, with lower levels of income elasticity representing a lower level of demand and vice versa.