Introduction
It is important to note that the rate of profitability and volume of sales for products and services are dependent on a multitude of factors. They can be essential and inelastic, or they can be highly elastic due to their luxurious nature. The given analysis will focus mainly on well-known Gucci bags, which provide an outstanding example to demonstrate how luxurious products operate in the economy.
Product Description
The Gucci bag is a luxury item that is sold by the luxury fashion brand Gucci and purchased by consumers who value high-end fashion and are willing to pay a premium for the brand’s iconic style and quality. According to economists, the definition of luxury and necessity use income elasticity of demand (Karlan & Zinman, 2018). On the one hand, a luxury item is a product with a high-income elasticity of demand, meaning that as consumers’ income increases, their demand for the product increases (Burke & Abayasekara, 2018). On the other hand, a necessity is a product with a low-income elasticity of demand, meaning that consumers will continue to demand the product even if their income decreases (Karlan & Zinman, 2018). In this case, the Gucci bag would be considered a luxury item as it has a high-income elasticity of demand. In terms of complements and substitutes, the Gucci bag has complementary products such as high-end clothing and accessories, as well as luxury jewelry. However, it has substitutes such as other luxury fashion brands such as Louis Vuitton, Chanel, and Hermès.
Demand Factors
There are several factors that can influence the demand for a product, such as the Gucci bag, by buyers. Macroeconomic factors include interest rates, inflation, and the overall state of the economy. If interest rates are low, consumers may be more likely to purchase luxury items like the Gucci bag because they have more disposable income. If the economy is in a recession, consumers may be more likely to limit their spending on luxury items (Salvatore, 2019). Microeconomic factors include the price of the product, advertising, and personal income. For example, if the price of the Gucci bag increases, the demand for the product may decrease. However, if the brand launches a new advertising campaign, this may increase demand for the product. Additionally, if a consumer’s personal income increases, they may be more likely to purchase luxury items like the Gucci bag. Other factors that can influence demand for the Gucci bag include the location of the buyer and the weather. If a buyer is in a location with a high concentration of high-end retailers, they may be more likely to purchase a luxury item like the Gucci bag.
Supply Factors
The supply of Gucci bags by the company is influenced by several factors as well. The first one is production costs, which include the cost of raw materials, labor, and production processes that will impact the company’s willingness to produce and sell the Gucci bag. If the cost of production increases, the company may choose to reduce the supply of the product. The second factor is technological advances since the latter processes can increase the efficiency of the company’s operations, which may lead to an increase in the supply of Gucci bags. The third one is competition because the level of competition in the market for luxury bags can influence the company’s willingness to sell Gucci bags (Salvatore, 2019). If competition is high, the company may choose to reduce the supply of the product in order to maintain its premium pricing. The fourth factor is government regulations and taxes, which can impact the cost of production and the company’s ability to sell Gucci bags. The last factor is market demand because the level of demand for Gucci bags will influence the company’s willingness to supply the product.
Fixed and Variable Costs
The production of a Gucci bag involves both fixed and variable costs. Fixed costs are costs that do not change with the level of production, such as rent for a factory, salaries for employees, and depreciation on production equipment. For example, the rent for a Gucci factory and the salaries of its employees would be considered fixed costs, regardless of the number of bags produced. However, variable costs change with the level of production and include raw materials, labor costs for production, and energy costs. For example, the cost of leather and other materials used to produce the Gucci bag, as well as the labor costs for sewing and assembling the bag, would be considered variable costs (Salvatore, 2019). It is likely that the company incurs some costs that have both a fixed and a variable component. For example, the cost of advertising and marketing the Gucci bag would have a fixed component in the form of salaries for marketing personnel and a variable component in the form of the costs of specific marketing campaigns.
Conclusion
In conclusion, the Gucci bag is a luxury product with high-income elasticity of demand and complementary and substitute products. The demand for the Gucci bag is influenced by a range of factors, including macroeconomic factors such as interest rates and inflation, and microeconomic factors such as the price of the product and personal income. The supply of Gucci bags by the company is influenced by a range of factors, including production costs, technological advances, competition, government regulations, and market demand.
References
Burke, P. J., & Abayasekara, A. (2018). The price elasticity of electricity demand in the United States: A three-dimensional analysis. The Energy Journal, 39(2), 123-146. Web.
Karlan, D., & Zinman, J. (2018). Price and control elasticities of demand for savings. Journal of Development Economics, 130, 145-159. Web.
Salvatore, D. (2019). International economics (13th ed.). Wiley.