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Luxury goods have a higher price elasticity of demand (ped) than necessity goods A ped of exactly 1 means demand is unitary elastic, where total revenue remains unchanged when the price changes. Price elasticity of demand (ped) measures the responsiveness of quantity demanded to a change in price
In other words, it shows how much the quantity demanded of a good will change if its price changes. For example, luxury goods have elastic demand because consumers can delay the purchase or forego buying the product if the prices are increased. When income increases, the proportion of spending on necessities generally decreases while spending on luxuries increases
During economic downturns, consumers may shift their spending from luxury goods to necessities, reflecting changes in their priorities based on budget constraints.
In conclusion, understanding the difference between necessities and luxuries, and how they affect price elasticity of demand, is crucial in economics It helps businesses in pricing strategies and governments in policy making. Understanding the distinction between necessity and luxury goods is important for businesses and policymakers For businesses, knowing whether their products are considered necessities or luxuries can help them tailor their marketing and pricing strategies to target specific consumer segments.
Necessities tend to have inelastic demand, while luxuries are more elastic Bread is a necessity with inelastic demand, while a vacation is a luxury with elastic demand. • elastic demand (ped > 1) In this case, the percentage change in demand is more than the percentage change in price
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