Why Luxury Is A Luxury

In economics, a luxury item is something that has high fixed costs, with an increase in income usually resulting in a decrease in costs, so that total expenditures on the item decline more quickly than a proportionally proportioned increase in income. Thus luxury items are generally expensive to buy in the first place, and then they are expensive to consume. Luxury items tend to be very overpriced relative to other similar goods, so the seller charges a premium for them. If demand for luxury increases, then not only does the premium on the item rise, but so does the amount of competition and the cost of the item.

Luxury goods can be overpriced because of demand. Suppose I want to purchase a pampering spa bath, and I want one that costs $1000. Obviously the supply cannot keep up with demand, and hence I end up getting a very expensive spa bath. However, if I am wealthy, I can easily afford these things. This means that if I want something very costly, like a spa bath for myself, I can probably get it. But then again, if I am not wealthy, then these things will obviously be very cheap, and therefore, very hard to get.

Luxury items tend to be very overpriced relative to other goods because they are very conspicuous and require a certain amount of convincing to make people want them. As income increases, so does the need to buy these things; hence, the relative prices drop down. Luxury goods, when bought in large quantities, command very high prices relative to other goods. If income increases, but expenditures remain the same, the quantity demanded drops down, forcing the price up.