It is observed that a luxury converts into necessity over time. People want a luxurious life so they keep trying to earn more and more. As their experience in a specific field grows, their earnings also increase. As a result, their purchasing power increased now they are in a position to enjoy some more luxuries. With time being, these luxuries become a part of their ordinary life course and become necessity for them. Although there involve some other factors being discussed hereunder:
1. The price of luxuries may fall over time making it easier to afford luxuries for people. There are so many factors which may affect the price of a luxury and are as under:
a) The first and most likely cause is technological progress which makes it very much easy, cheap and efficient to produce a luxury.
b) The second reason is profit margin in luxuries which may induce other companies to enter in the market and produce the goods of same nature. This may create competition. Competition may affect the price dually:
i. Advertisement and sales promotion activities may increase the cost of the goods sold, as the result increasing the price of luxury.
ii. To remain in a stable position in a competitive market, the producer may offer less and suitable prices, better terms and conditions and improved quality goods to the consumer. The demand for luxuries is highly elastic, so the demand of such products may increase rapidly.
c) Normally, inflation does not affect prices of luxuries much because of highly elastic demand. Although the price of goods do not increase in real terms due to inflation but consumer consider it as increase in price in real terms due to physiological effect. So, producers are reluctant to increase the prices of goods except in extra ordinary circumstances. As a result the value of money declines but the prices do not increase so it affects the prices inversely.
2. Now day’s different financial institutions e. g; banks and installment businesses have made it very much easy for the people to afford luxuries. We may take the example of car leasing schemes in Pakistan from many banking and financial institutions.
Thus, for the reasons discussed above a luxury becomes affordable and necessity for the majority of people living in that economy.
When a good has become necessity:
At the stage where a good has converted into necessity from luxury, government may impose some price restrictions and may decrease taxes on the good. So the price of the good may further decrease due to this fact making it yet more affordable for more people.
At the stage, the profit margin is this much low that some companies my retreat from the market and other may reduce the advertisement and sales promotion expenses to increase their profit margin to some extent. At that stage the advertisement and sales promotion expenses are not necessary but a burden because consumer is very much aware about the characteristics of good.
The price of the good remains stable for some time and then it may increase due to lack of competition and inflation factor.
However, it is quite unpredictable to announce the time duration which a luxury takes to become a necessity.
Examples in Pakistan’s economy:
The following examples may not fulfill all the essentials of theory discussed earlier but these are the things which have almost converted in the necessity from luxury. The deficiency to fulfill all the requirements of the theory of these goods may be is the weak economic and financial structure of the economy of the Pakistan.
Personal computers, Mobile phones, Cars, etc,
Sarfraz
