How do luxury goods differ in PED from necessity goods?

Luxury goods have a higher price elasticity of demand (PED) than necessity goods.

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. Luxury goods and necessity goods differ significantly in their PED due to the nature of their consumption.

Luxury goods are those that consumers buy more of as their income increases, such as designer clothing, high-end electronics, and luxury cars. These goods are not essential for survival or basic comfort, but they enhance the quality of life or social status. Because of this, consumers are more sensitive to changes in the price of luxury goods. If the price of a luxury good increases, consumers are likely to buy less of it or switch to a cheaper alternative. This makes the PED for luxury goods relatively high, often greater than 1, indicating that the quantity demanded is highly responsive to price changes.

On the other hand, necessity goods are those that consumers need to survive or maintain a basic standard of living, such as food, water, and basic clothing. Consumers will continue to buy these goods even if their price increases, because they cannot easily do without them. This makes the PED for necessity goods relatively low, often less than 1, indicating that the quantity demanded is not very responsive to price changes.

IB Economics Tutor Summary: Luxury goods have a high price elasticity of demand (PED), meaning their demand changes significantly with price variations. These include items like designer clothes and luxury cars, which are not essential but enhance lifestyle or status. Necessity goods, such as food and basic clothing, have a low PED as people need them regardless of price changes, showing less demand fluctuation.