Why do luxury goods have a different demand curve than necessities?

Luxury goods have a different demand curve than necessities because their demand is more elastic and influenced by income changes.

In economics, the demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period. For necessities, the demand curve tends to be inelastic, meaning that changes in price have a relatively small effect on the quantity demanded. This is because necessities, such as food and housing, are goods that consumers need to survive and thus, they will continue to buy them even if prices increase.

On the other hand, luxury goods, like high-end cars and designer clothes, have a more elastic demand curve. This means that the quantity demanded is highly responsive to changes in price. If the price of a luxury good increases, consumers are likely to buy less of it because it is not a necessary item for survival. Conversely, if the price decreases, consumers may buy more of the luxury good because it becomes more affordable.

Furthermore, the demand for luxury goods is also influenced by changes in income. This is represented by the income elasticity of demand. If consumers' income increases, they are more likely to buy luxury goods because they have more disposable income. Conversely, if their income decreases, they are likely to cut back on luxury goods because they have less disposable income. This is not the case for necessities, as consumers will continue to buy them regardless of changes in income.

In addition, the demand for luxury goods can also be influenced by changes in tastes and preferences, the availability of substitutes, and expectations about future prices and income. For example, if a new luxury brand becomes trendy, the demand for its products may increase. Or if consumers expect their income to increase in the future, they may be more willing to buy luxury goods now.

IB Economics Tutor Summary: Luxury goods have more elastic demand curves than necessities. This means their demand changes significantly with price variations and income levels. Necessities, essential for survival, have inelastic demand, remaining stable despite price changes. Luxury items, on the other hand, are often bought more with higher incomes and less when prices rise or incomes fall.