In market relations, the main participants are the consumer and the manufacturer. They participate in the formation of prices and form supply and demand. Modern economic theory hypothesizes that the consumer is the last resort, because only he can evaluate the result of the producer’s labor by buying or not buying his goods. In economics, all concepts and events are always interconnected. To define such concepts as basic necessities and luxury goods, it is worth to know what demand and elasticity are.
Demand definition
The law of demand is as follows: the higher the price, the lower the quantity. Demand shows how solvent the consumer of a certain product is at a certain price. Demand can be characterized by the magnitude of demand. This indicator indicates how many people can buy goods at a certain cost. They have the desire and willingness, as well as the opportunity and availability of money to buy goods.
But not the fact that a person will receive exactly the abundance of goods that he needs. How much product the consumer will receive depends on some economic factors. Suppose a manufacturer cannot produce the quantity of goods that a buyer needs.
Experts highlight individual demand and total. Individual demand is the demand for a specific product of a particular buyer, and the total demand of all consumers. Economists usually study the general demand, because the individual is dependent on the personal desires of the consumer and cannot show all the clarity of the situation on the market. For example, a certain buyer may not be interested in any product, but in the market he will be in demand.
Law of demand
As noted earlier, there is a law of demand. Let us repeat it again: when the price increases, the demand for the product decreases under certain factors. The law has some exceptions. For example, with an increase in the price of luxury goods, demand sometimes increases. This is due to the fact that when the price of a product increases compared to other prices, people begin to think that this product is better, as it costs more.
Stretches or not stretches
There is such a thing as demand elasticity. This indicator shows how much it will increase or decrease when price and non-price factors influence it. We consider income elasticity of demand. The indicator determines how much demand will change with changes in consumer income over a certain period of time. The income elasticity of demand is of the following forms:
- Positive form. With an increase in income, the volume of demand increases. This form of elasticity refers to this type of product, such as luxury goods.
- Negative form. Reduction in demand with increasing income. This form refers to substandard goods.
- Zero form. The volume of demand does not depend on income. This form includes basic necessities.
Elasticity Factors
The income elasticity of demand depends on several factors. These include:
- Importance, value, value for the consumer. The more the product the buyer needs, the less will be its elasticity.
- Will the goods be luxury goods or essential goods.
- Ordinary demand. When a consumer's income increases, he does not immediately acquire more expensive goods.
It is worth saying that for buyers who have different incomes, the same product can apply both to a luxury item and to a basic commodity. It is worth giving some examples of income elasticity of demand. These include a Porsche sports car. An individual can buy an expensive new car, as his income has increased. Bread with cereals and bran. Such bread is more expensive than ordinary bread, but also more useful. A person can also afford it with an increase in income. Handmade soap. The consumer can replace the old analogue of everyday goods with better and more expensive ones, as his income allows this. Expensive and high-quality gasoline. The buyer has the right to buy better gasoline to extend the life of the car all for the same reason - increased revenue.
Coefficient of elasticity
To measure the elasticity of demand, there is an elasticity coefficient for income. Economists have identified a formula by which it can be calculated:
E = Q1: Q / I1: I
Where:
I is the income of customers;
Q - the volume of goods.
The value of the coefficient is determined by the type of product.
Exactly what is needed
There are several types of goods: ordinary and lower. Normal (normal) - goods for which demand is growing along with income. In turn, they are divided into two types: luxury goods, necessities (which are often consumed and used every day, for example, toothpaste). The coefficient of elasticity of demand for ordinary items is less than unity, since with an increase in income, the consumer seeks to purchase rarer goods.
Luxury goods are goods that not everyone can afford. Their people buy less often. Cars are a luxury item. Essentials have a saturation limit. For example, soap. People will buy as much as they can consume it. No matter how much soap, it will always be needed.
Expensive pleasure
Luxury goods - things or goods that are not related to the basic needs of the consumer. People can live without them. The coefficient of elasticity of luxury goods is higher than one. Consumer income is increasing and the proportion of luxury goods is growing. Demand for luxury goods appears only when the consumer reaches a certain level of income. People first buy products related to survival, and then think about "excesses."
Patients will not reduce the number of visits to the doctor, even if the price of medical services rises. And at the same time, an increase in the price of a yacht leads to a decrease in demand. What is the reason for this phenomenon? The reason is that many consumers consider visiting a doctor a necessity for themselves, and buying a yacht is a luxury. Consumer purchasing power helps economists determine which category a product should belong to. For a person who loves the sea and has excellent health, a yacht can be considered as a necessity, and going to the doctor is a luxury.
Anyone will distinguish a gift option from a regular pen. What is the difference between them? The gift option has brighter ink, a better core and body are more beautiful. It is more convenient to hold such a handle, it will not slip out and looks solid. Such gift pens are usually packed in special cases that are not needed in everyday life. That is, you buy an item that you will not use later. Such an expensive pen is prestigious, but not very functional.
Lower goods are goods of low quality. Demand for such items is declining. They are replaced with better ones. These include second-rate food, second-hand clothes.
Conclusion
Countries producing essential commodities (agricultural products, mining, electricity) are not in a better position at international bidding than countries producing interior luxury goods, cars, and equipment. With increasing consumer incomes, the cost of essential goods is far behind the value of luxury goods. This is one of the reasons for the division of the world economy.