In market relations, the main participants are the consumer and the producer. They participate in price formation 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 work of the producer, buying or not buying his product. In economics, all concepts and events are always interconnected. To define concepts such as essentials and luxuries, it is worth knowing what demand and elasticity are.
Define demand
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 the demand. This indicator indicates how many people can buy a product at a certain cost. They have the desire and willingness, as well as the ability and availabilitymoney to buy goods.
But it is not a fact that a person will receive exactly the abundance of goods that he needs. How much the consumer will receive depends on some economic factors. Let's say the manufacturer can't produce the quantity of the product that the buyer needs.
Experts single out individual and general demand. Individual demand is the demand for a specific product of a specific buyer, and general demand is the demand of all consumers. Economists usually study the general demand, because the individual depends on the personal desires of the consumer and cannot show the full clarity of the situation on the market. For example, a certain buyer may not be interested in any product, but it will be in demand in the market.
The law of demand
As noted earlier, there is a law of demand. Let's repeat it again: when the price increases, the demand for the product decreases under certain factors. The law has some exceptions. For example, when the price of luxury goods increases, there is sometimes an increase in demand. This is because when the price of a product increases relative to other prices, people begin to think that this product is of better quality because it costs more.
Stretch or not stretch
There is such a thing as the elasticity of demand. This indicator shows how much it will increase or decrease under the influence of price and non-price factors. We will consider income elasticity of demand. The indicator determines how much demand will change with a change in consumer income over a certain period of time. Income elasticity of demand has the following forms:
- Positive form. As income increases, demand increases. This form of elasticity refers to such goods as luxury goods.
- Negative form. A decrease in demand as income increases. This form refers to low-quality goods.
- Zero form. The volume of demand does not depend on income. This form includes essentials.
Elasticity factors
Income elasticity of demand depends on several factors. These include:
- Importance, value, significance for the consumer. The more the product is needed by the buyer, the less its elasticity will be.
- Whether the product will be a luxury item or an essential item.
- Ordinary demand. When a consumer's income increases, he does not immediately purchase more expensive goods.
It is worth saying that for buyers with different incomes, the same product can be both a luxury item and a basic necessity. 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 because his income has increased. Bread with cereals and bran. Such bread is more expensive than ordinary bread, but also he althier. A person can also afford it with an increase in income. Handmade soap. The consumer can replace the old analogueeveryday goods to better and more expensive ones, as his income allows. Expensive and high-quality gasoline. The buyer has the right to buy better gasoline to extend the life of the car for the same reason - increased income.
Elasticity coefficient
To measure the elasticity of demand, there is an income elasticity coefficient. Economists have defined a formula by which it can be calculated:
E=Q1:Q/I1:I
where:
I - income of buyers;
Q is the volume of goods.
The value of the coefficient is determined by the type of product.
What you need
There are several types of goods: ordinary and inferior. Ordinary (normal) - goods, the demand for which grows with income. In turn, they are divided into two types: luxury items, necessities (which are more consumed and used every day, for example, toothpaste). The elasticity of demand for common items is less than one, because as income increases, the consumer seeks to purchase rarer goods.
Luxury goods are goods that not everyone can afford. People buy them less often. Cars are a luxury item. Essentials have a saturation limit. For example, soap. People will buy as much as they can consume. No matter how much soap costs, it will always be needed.
Expensive pleasure
Luxury items - things or goods that are not related to basicthe needs of the consumer. People can live without them. The coefficient of elasticity of luxury items is above unity. Increasing consumer income and growing share of luxury goods. The demand for luxury goods appears only when the consumer reaches a certain level of income. People first buy survival-related goods, and then think about "excesses".
Sick people will not reduce their number of visits to the doctor, even if the price of medical services increases. 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 and buying a yacht a luxury. The purchasing power of the consumer helps economists determine which category to classify a product in. For a person who loves the sea and is in perfect he alth, a yacht can be considered a necessity and a trip to the doctor a luxury.
Any person will distinguish the gift version of the pen from the usual one. What is the difference between them? The gift version has brighter ink, a better core and a prettier body. 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.
Inferior goods - goods with lowquality. The demand for such items is declining. They are being replaced with better ones. These include second-rate food, second-hand clothes.
Conclusion
Countries that produce essential goods (agricultural products, mining, electricity) in international trading are no better off than countries that produce luxury interior items, cars, appliances. As consumer incomes rise, the cost of basic commodities lags far behind the cost of luxury goods. This is one of the reasons for the division of the world economy.
