Luxury goods have a high price elasticity of demand due to their sensitivity to price changes. Elasticity and inelasticity of demand refer to the degree to which demand responds to a change in an economic factor, with price being the most common economic factor used when determining elasticity. Essential items, such as medication, are considered inelastic, while luxury items like cruise trips and high-end watches are considered elastic.
In microeconomics, whether demand is elastic or inelastic depends on factors like changes in price and competitive dynamics. Goods that can only be produced by one supplier generally have inelastic demand, while products that exist in a competitive marketplace have elastic demand.
A normal good has a positive income elasticity of demand (YED), meaning that an increase in consumer income causes an increase in demand for luxury goods. In economics, luxury goods have a positive income elasticity of more than 1, meaning that when consumer income increases by 5%, the quantity of demand for luxury goods decreases.
In the cruise industry, luxury goods like private airplanes and yachts typically have elastic demand curves, while supply of these goods is inelastic. If an excise tax were imposed on yacht buyers, they would pay more. The elasticity of the demand and supply curve is measured by the percentage change in quantity divided by the percentage change in income.
Luxury goods can be classified as either elastic (sensitive to price changes) or inelastic (less sensitive to price changes). For example, if a company sells yachts, the demand for them would likely be both income inelastic and price elastic.
📹 Tax Revenue and Deadweight Loss
Why do taxes exist? What are the effects of taxes? We discuss how taxes affect consumer surplus and producer surplus and …
📹 Markets: Elasticity of Demand and Supply
Introducing the idea of elasticity. Equation for the elasticity of demand, and the four elements that affect it. Also the equation for the …
The explanation about deadweight loss is the perfect example of why economics and policy don’t mix well. People would complain like crazy if you taxed inelastic goods. If we were to tax basic necessities, there would be an uproar about how evil this is. We can’t even get the public to release the tax break on healthcare even though it is causing a mess. Maybe we should call the relative elasticity of demand in relation to taxes the “coefficient of complaining curve”. Very inelastic = lots of complaining.
I know he mentioned exceptions, but again, the problem with this followed to it’s conclusion and put into practice is the diagram around 7:27 the left would represent something like luxury yachts and the right would represent something like electricity. “Pretty clearly we want to tax the hell out of electricity because if people are held hostage to it you can get away with it.” Sooner or later its going to get around to something people need instead of want.
I feel like you cannot use the example about the yacht as there are other confounding variables. There may have been a fall in demand for luxury goods due to the economic crisis around the 1990s. I do not think we can suggest causality between the tax and the fall in yacht purchases. Not sure about what people think about this.
Since the amount of the dead weight loss that is a decrease of consumer surplus is due to a reduction in consumption, why is it not named savings, which is usually considered a good thing. It seems to me that only the decreases in producer surplus is a real loss to the economy and even they could use the resources to produce other things like trips to a cheaper city.
Pareto optimality means the “free market” maximizes happiness only from the initial distribution. If you want to maximize happiness you might want to change that initial distribution, if you want to respect that distribution you aren’t interested in maximizing revenue. Are you a Utilitarian or a Libertarian? (And why would you be either a Utilitarian or a libertarian given that neither are appealing doctrines?)
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