What is 'Luxury Item'

A luxury item is not necessary for living, but it is deemed as highly-desired within a culture or society. The ability to purchase or finance a luxury item is directly proportionate to ones' income or assets. In other words, as people move into higher income brackets, they are more able and more likely to purchase more expensive luxury goods.

BREAKING DOWN 'Luxury Item'

Luxury items are also known as "positional goods" because they signal that the owner has achieved a certain position or status within society to be able to afford them. Certain luxury items may be subjected to a specific tax or "luxury tax." Large or expensive recreational boats or automobiles can be subject to a federal tax. For example, the U.S. levied a luxury tax on certain automobiles in the 1990s, but ended the tax in 2003. Luxury taxes are considered progressive because they typically only affect people with high net wealth or income.

Luxury items have income elasticity of demand, which means as people become wealthier, they will buy more of such goods. In the same way, if there is a decline in income, demand for luxury items will decline.

A luxury good may become a normal good or even an inferior good at different income levels, which means if a wealthy person gets wealthy enough, they may stop buying increasing numbers of luxury cars in order to start collecting airplanes or yachts (because at higher income levels, the luxury car would become an inferior good).

Some luxury products purport to be examples of Veblen goods with positive price elasticity of demand. For example, raising the price on a bottle of perfume can increase perceived value, which can cause sales to increase, rather than decrease.

Luxury items can also refer to services, such as full-time or live-in chefs and housekeepers. Some financial services can also be considered luxury services by default because persons in lower-income brackets generally do not use them. Luxury goods also have special luxury packaging to differentiate the products from mainstream products of the same category.

Luxury Items and Quality

Although the designation of an item as a luxury item doesn't necessarily connote high quality, such goods are often considered to be on the highest end of the market in terms of quality and price. Such items might include haute couture clothing, accessories and luggage. Many other markets have a luxury segment, such as automobile, yacht, wine, bottled water, coffee, tea, foods, watches, clothes and jewelry.

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