This paper explains concepts of demand elasticity, namely price elasticity of demand, income elasticity of demand, and cross elasticity of demand, as well as how these economic concepts can shed light on the luxury goods market, in particular, looking at fashion retail brands such as Prada and Gucci.
Firstly, price elasticity of demand can shed light on the luxury goods market; it measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. The demand for a good is said to be price elastic if a given percentage change in its prices causes a more than proportionate change in its quantity demanded, ceteris paribus. Conversely, the demand for a good is said to be price inelastic if a given percentage change in its price results in a less than proportionate change in its quantity demanded, ceteris paribus. A fall in price will result in a more than proportionate increase in quantity demanded for good that is price elastic. Conversely, given the same decrease, it will result in a less than proportionate increase in quantity demanded for a good that is price inelastic. While branded goods such as bags, shoes, or clothing from Prada and Gucci, can be considered demand elastic because they take up a large proportion of an individual's income, they can also arguably be considered demand inelastic because, to people who really desire these goods and have a strong taste and preference for these goods, there are no close substitutes for these goods. Therefore, it can be argued that changes in price would not affect the quantity demanded for these highly sought after goods that much.
Secondly, income elasticity of demand can shed light on the luxury goods market; it measures the responsiveness of the demand for a good to a change in income, ceteris paribus. Positive income elasticity of demand refers to the increase in demand for a good when income increases. Such goods are known as normal goods. Normal goods can be sub-divided to normal-necessity and normal-luxury goods. A normal-necessity good is income inelastic, which means that a rise in income will result in a less than proportionate change in demand whereas a normal-luxury good is income elastic, which means that a rise in income will result in a more than proportionate change in demand. Negative income elasticity of demand refers to the decrease in demand for good when income increases. Such goods are known as inferior goods. Inferior goods occur because rising income levels cause consumers to switch from lower quality product to a higher quality product as they are able to afford better alternatives. With these economic theories and concepts in mind, the luxury goods market is clearly in the realm of normal luxury, because as incomes rise in China, more Chinese have reportedly started buying branded goods, more than proportionately, especially Louis Vuitton. In fact, as incomes rise in Singapore, many have also started buying more branded goods as part of their lifestyles, and thus clearly we can utilise this concept both for the consumer – to understand their behaviour and the type of the goods that they are buying – as well as from the view of the retailer, who would do well to sell branded goods in a rising economic situation of high economic growth, and rising disposable incomes.
Third, cross elasticity of demand measures the responsiveness of demand for a good to a change in price of another good, ceteris paribus, and can be used to understand the luxury market. Positive cross elasticity of demand means the demand for a good and the price of another good change in the same direction. This suggests that the goods could be substitutes. Several substitutes to luxury goods are normal necessity goods, such as normal clothing brands or mass market brands, because no one has to only buy branded items. Negative cross elasticity of demand means that the demand of a good and the price of another good changes in the opposite direction. This suggests that the goods could be complements. For example, Prada and LV have complements for all their items, ranging from bags to wallets, to clothes and shoes. Thus, understanding cross elasticity is useful and relevant in the real world.
In conclusion, PED, YED, and XED can shed light on the luxury goods market, and demonstrate the usefulness and relevance of demand and supply analysis and the extent of the changes on differing types of goods. However, we should be alert to the fact that the ceteris paribus condition must hold for the analysis to be sound, and in real life often ceteris paribus does not hold, but, in general, elasticity of demand concepts are useful in understanding the luxury market and any other market.
JC Economics Essays - Written under strict examination conditions, this H1/ H2 A levels economics essay on the luxury goods market was inspired by a few economics students and a field trip to Marina Bay Sands Singapore to see luxury brands, and eventually refined to be improved for sharing on this economics blog. The question is: what was good about this essay that made it receive a high grade by different economics examiners? Do think about it. Thanks for reading and cheers.
