Introduction
In economics, goods are broadly categorized into two types: luxury goods and necessity goods. Luxury goods are those considered non-essential and often high-priced, purchased for their status, quality, or exclusivity. Examples include expensive jewelry, designer clothing, and luxury cars. Conversely, necessity goods are deemed essential for everyday life, such as food, clothing, and housing. The demand for these goods is generally less sensitive to changes in income.
To understand how income changes affect the demand for different types of goods, we must consider the concept of income elasticity of demand (IED). This measures the responsiveness of the quantity demanded of a good to changes in consumer income. A positive IED indicates that demand rises with income, while a negative IED signifies that demand falls with income. It is crucial to recognize that a good classified as a luxury or necessity for one consumer may be different for another, depending on their income level and individual needs.

Income Elasticity and Demand
The income elasticity of demand varies significantly between luxury and necessity goods.

⭐Luxury Goods: Typically, as income rises, demand for luxury goods increases disproportionately. This is because consumers have more disposable income to spend on non-essential items. They see these goods as desirable symbols of status, quality, and achievement. Luxury goods typically have a high positive IED, indicating a strong response to income fluctuations. For example, as economies grow and middle classes expand, we often see increased demand for luxury cars, high-end electronics, and designer fashion.
⭐Necessity Goods: The demand for necessity goods tends to be relatively stable, even when income changes. This is because, regardless of income, consumers will likely always need basic necessities. While the specific quality or type of certain necessity goods might change with income, the overall demand remains relatively constant. Necessity goods generally have a low, even negative, IED, showing a muted response to income changes. For instance, while a higher-income household might purchase higher-quality groceries, the overall demand for food remains essential.


Impact of Rising Incomes
Rising incomes have different impacts on the demand for luxury and necessity goods.


⭐Luxury Goods: When incomes rise, demand for luxury goods increases significantly. This is driven by a combination of factors:

⭐Increased purchasing power: Higher incomes provide consumers with more disposable income to spend on non-essential items.
⭐Status and prestige: Luxury goods often carry a sense of status and prestige, becoming more desirable as consumers climb the socioeconomic ladder.
⭐New markets: Rising incomes often create new markets for luxury goods, particularly in emerging economies where previously there was limited access to such products.
⭐Product differentiation: As consumers become more affluent, they may demand more customized and exclusive goods, leading to increased product development and innovation.


⭐Necessity Goods: While the demand for necessity goods is relatively stable, rising incomes can influence the types of products consumed.

⭐Quality shift: Consumers with higher incomes may opt for higher quality, more premium versions of necessity goods, such as organic food or high-end appliances.
⭐Convenience: Rising incomes may also lead to an increased demand for convenience goods, such as ready-made meals or services like grocery delivery.




Impact of Falling Incomes
When incomes decline, the demand for luxury and necessity goods is affected differently.

⭐Luxury Goods: A decrease in income leads to a significant decline in demand for luxury goods. This is because consumers are forced to cut back on discretionary spending and prioritize essential needs.

⭐Reduced purchasing power: Lower income reduces the purchasing power, making luxury goods less affordable.
⭐Status anxiety: During economic downturns, there might be a shift in societal values, with less emphasis on status symbols and more focus on practical needs.
⭐Business challenges: Luxury businesses may struggle to maintain profitability as demand falls, impacting investment and employment in the sector.


⭐Necessity Goods: While the demand for necessity goods remains relatively constant, falling incomes can influence purchasing decisions.

⭐Shift towards cheaper alternatives: Consumers may seek cheaper alternatives for necessity goods, such as generic brands or discount stores.
⭐Reduced quality: Consumers may have to lower the quality of purchases, trading down for less expensive options even within the necessity category.




Real World Examples
Numerous real-world examples illustrate the impact of income changes on demand patterns.

⭐Growth of the luxury car market in emerging economies: As economies like China and India experience rapid economic growth, a rising middle class has fueled significant demand for luxury cars, reflecting the high IED of these goods.
⭐Resilience of the food market during economic downturns: Despite economic downturns, the demand for food generally remains relatively stable. While consumers might shift towards cheaper alternatives, they will still prioritize basic necessities, demonstrating the lower IED of this category.
⭐Impact of COVID-19 on luxury travel: The COVID-19 pandemic significantly reduced demand for luxury travel, highlighting the vulnerability of this sector to income shocks and economic uncertainty.


Conclusion
Changes in income levels significantly impact the demand for goods, with luxury and necessity goods exhibiting distinct patterns. Luxury goods experience high income elasticity, demonstrating a strong response to income changes, while necessity goods generally have a low or negative income elasticity, showing a muted response. Rising incomes drive increased demand for luxury goods, creating new markets and product development opportunities. Falling incomes lead to a significant decline in demand for luxury goods, while necessity goods remain relatively stable but may see shifts towards cheaper alternatives. It is important to recognize that the classification of goods as luxury or necessity is not always rigid, and these categories can shift based on individual circumstances, cultural norms, and economic conditions. Further research could explore the influence of other factors, such as social status, cultural trends, and marketing strategies, on demand patterns for both luxury and necessity goods.
Sources:

Mankiw, N. G. (2021). Principles of macroeconomics (9th ed.). Cengage Learning.
Sloman, J., & Hinde, K. (2019). Economics (10th ed.). Pearson Education.