What Makes Something a Luxury?

How economists define luxury goods through income elasticity, and how luxury differs from ordinary products in quality, price and meaning.

Economists define luxury goods by how demand responds to income.

Income elasticity

Necessities: demand rises less than income. If income rises 10 percent, spending on salt rises very little.
Luxury goods: demand rises more than income. If income rises 10 percent, spending on luxury handbags may rise by more than 10 percent.

In technical terms, luxuries have an income elasticity greater than 1.

Everyday meaning

In daily life, “luxury” means products that are:

Expensive relative to alternatives.
High in quality or craftsmanship.
Associated with prestige and exclusivity.
Sold by famous brands like Louis Vuitton, Rolex or Chanel.

Relative luxury

What counts as luxury depends on context. An air conditioner may be a luxury for a poor household but a necessity for a wealthy one in a hot city.

Luxury grows with wealth

As economies grow, spending on luxuries rises faster than income, which is why luxury firms follow rising wealth in countries like China and India.

Two purchases

When a family's income doubles, they buy a little more rice but spend far more on restaurant meals, travel and designer clothes. Rice is a necessity; the others behave like luxuries.

Thinking luxury is only about price

Economists define it by how demand rises faster than income.

Key takeaways

Luxury goods have demand rising faster than income.
Necessities have demand rising slower than income.
Luxury is associated with price, quality, prestige and exclusivity.
What counts as luxury depends on context.