The price consumers are willing to pay for a product depends on whether they view it as a necessity or a luxury. Necessities—such as food, water, and basic healthcare—are essential for daily life, meaning people must buy them regardless of price changes. Luxuries—such as designer clothing, high-end electronics, and vacations—are discretionary, meaning people can choose to purchase them when prices are favorable or opt out entirely. This project challenges students to research and analyze how consumer and producer surplus differ between luxury and necessity goods and explore which market players benefit the most in each category.

Students will begin by defining consumer and producer surplus and investigating how they apply to different types of goods. They will analyze why necessities tend to have lower consumer surplus since people must buy them even at high prices, leaving producers with greater control over pricing. In contrast, luxuries often have higher consumer surplus, as buyers may be willing to pay much more than the listed price, especially when the product offers status, exclusivity, or unique features.

A key component of this research will involve real-world pricing and market trends. Students should study products such as medications, grocery staples, and public transportation fares (necessities) and compare them with luxury brands, entertainment services, and high-end automobiles (luxuries). They should also analyze pricing strategies, such as how pharmaceutical companies keep prices high due to inelastic demand, while luxury brands use premium pricing to capture consumer surplus from wealthier buyers.

The final research paper should compare the balance of surplus in these two market categories, discussing who benefits more—consumers or producers—in both cases. The goal is to provide insight into how businesses set prices, how consumer surplus is distributed, and how economic status affects purchasing power.