Income Effect Luxury Goods

A monopoly firm which produces a luxury goods may increase its marginal income by considering the snob effect while making price discrimination.

Income effect luxury goods. Given the tastes and preferences of the consumer and the prices of the two goods if the income of the consumer changes the effect it will have on his purchases is known as the income effect. In the case of luxury goods there are 2 possibilities either the good is a normal good or giffen good. Businesses will expect to sell more of these luxury goods and services so they will produce more perhaps employing more staff. A luxury goods with limited supply creates the same effect on the snob consumer as well.

Luxury goods are in contrast to necessity goods where demand increases proportionally less than income. The relationship between. Income effect is illustrated in fig. Luxury goods is often used synonymously with superior goods.

However in the case of giffen good the income effect is bigger than the substitution. It depends on the type of the good whether it is normal inferior or giffen good. Income effect substitution effect and price effect. In the case of normal good the substitution effect is bigger than the income effect where the price effect is positive.

With given prices and a given money income as indicated by the budget line p 1 l 1 the consumer is initially in equilibrium at point q 1 on the indifference curve ic 1 and is. Upto point r the. In figure 12 15 c good y is inferior and x is a superior or luxury good. In economics a luxury good or upmarket good is a good for which demand increases more than proportionally as income rises so that expenditures on the good become a greater proportion of overall spending.

How reductions in consumer income affect businesses. The income effect represents the change in an individual s or economy s income and shows how that change impacts the quantity demanded of a good or service. Literature suggests that there are a number of other factors other than income that lead to purchase of luxury fashion products such as brand. Thus the income effect means the change in consumer s purchases of the goods as a result of a change in his money income.

Examples of luxury goods also called superior goods upmarket goods or veblen goods are fancy cars yachts expensive watches jewelry posh restaurants designer clothes and footwear and expensive vacations.