2.18 : Effect of Necessities and Luxuries on Elasticity of Demand

The concept of price elasticity of demand is profoundly influenced by the categorization of goods into necessities and luxuries, each affecting consumer response to price changes differently.

Necessities: These are the must-haves for daily living, like bread, milk, water, electricity, and basic healthcare. Even if prices increase, people still need to buy these items. Therefore, the demand for necessities is more inelastic. For example, even if the cost of basic healthcare services rise, individuals still seek necessary medical care due to its essential nature.

Luxuries: Contrary to necessities, luxuries comprise non-essential items aimed at providing comfort or enjoyment. This category includes high-end electronics, designer apparel, luxury vehicles, upscale dining experiences, and exotic vacations. The demand for luxury items is more elastic. An increase in the price of an exotic vacation, for instance, may lead consumers to postpone the vacation or consider less expensive alternatives.

Other factors can affect the elasticity of demand for necessities and luxuries, with income level being a significant determinant. Consumers with higher incomes are less affected by price hikes and often continue to buy luxury items, while those with lower incomes may cut back on such purchases.