Thursday, February 12, 2009

Flowers On Valentine's Day As Luxury Goods

Flowers as luxury goods

I came across an interesting news in The Star, Malaysian local newspaper & thought I would like to share with all readers. Again it really amaze me how simple economics concept can be applied just everywhere even onto roses & chocolates which are very popular with Valentine’s Day.

These are the 3 quotes:

“Global financial crisis seems to have taken its toll on Valentine’s Day romance here with people spending less on flowers and chocolates to show their love”

“Although customers are still willing to spend on flowers, it will just be between RM100 and RM200”

“Previously, the highest amount was RM600 for a bouquet and the number of RM100 bouquets sold was definitely more”

From the above statements, I conclude that roses & chocolates are best viewed as luxury goods. Recall the concept of income elasticity of demand (YED). It measures the responsiveness of quantity demanded for a good to a change in income

Or we can write it mathematically:

YED = (% of change in quantity demanded) / (% of change in income)

Again there 3 types of YED:

(1) YED less than 0 (inferior). Inferior goods are goods that we consume less in the period of rising income. Say YED = -0.6. This means as our income increases by 10%, the quantity demanded for that good will fall by 6% & vice versa. I don't think flowers for lovers are inferior goods, otherwise we couldn't have bought it in the first place!

(2) YED between 0 & 1 (necessities). Normal goods are those which we will consume more in the period of rising income, but the increase in its demand is less than proportionate of income. Say when average income increases by 10%, the quantity demanded for that good will increase also but less than proportionate say 8%. So when we substitute into formula we will get 0.8. Well, I don't think it's a necessity either. Do you buy these flowers everyday?

(3) YED> 1 (luxuries). Here I will explain why chocolates & flowers are viewed as luxury. For luxury goods any small increase in income say 10%, will trigger a larger than proportionate demand for it say 15% & vice versa. Hence we get YED = 1.5. The article mentioned that in the previous, there were even people taking up flowers worth RM 600 per bouquet, with RM 100 - 200 selling like hot cakes. Now it seems like the willingness of customers to pay had fallen as none of them are willing to offer anything more than RM 200

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