Luxury Goods Market – Is It contracting?

In economics, a luxury product is a good whose demand grows more than proportional to income, so that expenses on the good automatically become a higher percentage of overall earnings. So, when people have money to spend, they will always want and look for luxury items. Luxury items tend to be very special, and it takes a very special person, or perhaps a very rich relative, to afford them.

The second part of this equation is supply. There is less luxury goods market in developed countries than there is in developing countries, and even less in undeveloped countries. So the supply is limited, and demand is high. That means that although consumers in developed countries may be willing to pay more for luxury goods like cars and phones, they are not willing to pay as much as their counterparts in developing countries for the same products.

This leads to the last part of the equation – perceived value. The higher the price of luxury products, the higher the perceived value. If consumers believe they are getting a great product, they will be willing to pay the premium, and there will be enough buyers for the luxury product. The problem comes when consumers perceive value that is much lower than the actual value. If that happens, the luxury market will contract, and the companies manufacturing those products will be unable to survive – at least not without offshore production.