Friday, June 1, 2007

Redefining Luxury as Necessity

In economics, a luxury good is a good for which demand increases more than proportionally as income rises, contrast with inferior good and normal good. Luxury goods are said to have high income elasticity of demand: as people become more wealthy, they will buy more and more of the luxury good. This also means, however, that should there be a decline in income its demand will drop. It must be noted, though, that income elasticity of demand is not constant with respect to income, and may change sign at different levels of income. That is to say, a luxury good may become a normal good or even an inferior good at different income levels, e.g. a wealthy person stops buying increasing numbers of luxury cars for his automobile collection to start collecting airplanes (at such an income level, the luxury car would become an inferior good).

My argument is not that this is true, not that these good should be avoided, but more people than thought of before should be living the life of luxury. My goal, through taking the ideas used to value a company, is to use discounted cash flow analysis to show the actual future value differences of regular vs. luxury goods that we see everyday. From the lady who invented the little black dress, "Luxury is extremely superfluous, but extremely necessary," observed that legendary trendsetter, Coco Chanel.

According to dictionaries, luxury is something that is not necessary for life but can make it more enjoyable or comfortable. Sumptuousness and extravagance are a couple of synonyms for luxury. Unfortunately/fortunately, these dictionaries are right and wrong. It not only makes life more enjoyable and comfortable, but for the lives we live in today's society, spending more makes sense.

Now, I am not promoting paying more than something is worth, but not settling for anything less than the best. Best mattress, best suit, best car, best life. If you do your necessary due diligence, luxury goods hold their value better and your enjoyability with the good is much higher (debatable).

I will try to do this exercise with a couple of examples; durable goods that can be found everyday that both have common and luxury substitutes. Some examples mentioned were clothing, automobiles, and mattresses. I would appreciate any thoughts you might have as well.