How does elasticity of demand differ for luxury and necessity goods?

In one line

The rule

Elasticity of demand measures how much the quantity demanded of a good changes when its price changes.

The formula is: E_d = (% Change in Quantity Demanded) / (% Change in Price) Where:

• E_d = Elasticity of demand
• % Change in Quantity Demanded = (New Quantity − Old Quantity) / Old Quantity × 100
• % Change in Price = (New Price − Old Price) / Old Price × 100

Let's understand it simply

Imagine you buy onions every week for your kitchen. Even if the price goes up, you still need onions for cooking. You might buy a little less, but you cannot stop completely. This is a necessity good (something you really need). Now, think about a new smartphone. If the price goes up, you might wait or not buy it at all. You do not need it for daily life. This is a luxury good (something you want, but do not need).

So, for onions (necessity), a price change does not change how much you buy by much. For smartphones (luxury), a price change can make a big difference in how many people buy.

How it works

1. Necessity goods are things you need for daily life (like rice, salt, milk).
2. Luxury goods are things you want, but can live without (like gold jewellery, air conditioners, designer clothes).
3. When the price of a necessity goes up, people still buy almost the same amount. The demand does not change much.
4. When the price of a luxury goes up, people buy much less. The demand drops a lot.
5. So, necessities have inelastic demand (elasticity less than 1), and luxuries have elastic demand (elasticity more than 1).

The story behind it

The idea of elasticity of demand was first explained by Alfred Marshall, a famous British economist, in the late 1800s. He wanted to understand why some goods are affected a lot by price changes, while others are not. He noticed that people cannot easily stop buying basic things, but they can delay or skip buying expensive, non-essential items. This helped economists and shopkeepers understand how people react to price changes.

Where you see it in real life

• Petrol for bikes: Even if petrol price rises, most people still need to travel to work or school. Demand does not fall much. (Necessity, inelastic)
• Movie tickets: If ticket prices go up, many people may skip watching movies in the theatre. (Luxury, elastic)
• Salt: Even if salt price doubles, people still buy almost the same amount because it is essential for food. (Necessity, inelastic)
• Branded shoes: If the price increases, people may not buy them or may switch to cheaper brands. (Luxury, elastic)
• Pressure cookers: If the price increases, people may delay buying a new one, unless the old one breaks. (Luxury, elastic)
• Rice or wheat: Price changes do not affect demand much, as these are staple foods. (Necessity, inelastic)

Why it matters

• Helps businesses set prices: Shops know they can increase prices of necessities without losing many customers, but must be careful with luxury goods.
• Government tax policy: The government often puts higher taxes on luxury goods, as people can avoid them, but keeps taxes low on necessities.
• Planning supply: Farmers and companies can plan how much to produce based on how sensitive demand is to price.
• Exam questions: Many economics questions ask about elasticity and its effect on different types of goods.

Worked example

Let’s compare two goods: rice (necessity) and chocolates (luxury).

Rice:

Given: Price rises from ₹40/kg to ₹44/kg (10% increase)
Quantity demanded falls from 100 kg to 98 kg (2% decrease)
Step 1: Write the rule        E_d = % Change in Quantity Demanded / % Change in Price
Step 2: Put in the numbers    E_d = (−2%) / (10%)
Step 3: Answer                E_d = −0.2 (inelastic)

Chocolates:

Given: Price rises from ₹20 to ₹25 (25% increase)
Quantity demanded falls from 100 bars to 70 bars (30% decrease)
Step 1: Write the rule        E_d = % Change in Quantity Demanded / % Change in Price
Step 2: Put in the numbers    E_d = (−30%) / (25%)
Step 3: Answer                E_d = −1.2 (elastic)

Common mistakes

• Thinking all goods react the same to price: Necessities and luxuries behave differently.
• Forgetting the sign: Elasticity is usually negative for normal goods (price up, demand down), but we focus on the size (absolute value).
• Mixing up necessity and luxury: Some goods can be a necessity for one person and a luxury for another. Always think about the context.
• Assuming expensive means luxury: Not all expensive things are luxuries (medicine can be costly but is a necessity).

Remember it

Necessities: price changes, demand stays; Luxuries: price changes, demand jumps.