Christmas is an enjoyable time for many, including many non-Christians living in countries where Christians are a minority. It is a time for presents and food and thinking of others. This post identifies some unexpected ways that the five basic principles of economics appear during this time.
Familiar attempts to apply economic ideas to Christmas include predictions concerning how much people will spend during this time ($921 in US) or the current cost of providing the 12 Days of Christmas (US$49,263) to a loved one. These cute stories will be forgotten tomorrow.
More memorable insights include
Margins
Spending is an obvious margin of adjustment, both in total and when deciding what to buy for others.
If buying gifts, should you buy one impressive gift, lots of little gifts or a physically big gift? This puzzle is especially relevant when giving to small children, who have little sense of monetary value and who compete for bragging rights with friends and siblings.
Opportunity Cost
This is a time of year when charities reach out and remind everybody that some people are less fortunate. Some people must balance the expenses of gifts and a fancy turkey dinner against paying for winter clothing, rent and food on every other day of the year.
Children face a different kind of budget constraint, since a child’s budget constraint is not fixed in the same way that their parent’s budget is. Children might get extra money by begging their parents for the opportunity to do extra chores at home or an increase in their allowance or they could (politely) ask grandparents for extra money. Or they could make gifts by hand. In other words, the relevant opportunity cost of giving gifts is not a number written on a price tag but the time spent.
Equilibrium
Every year, there is a hot toy. Barbie dolls and video games may sell more but the media focus on the toy that everybody wants this year and almost nobody can find. Media stories may come in one of two stories. The first focuses complaints that it is so much higher than the list price at the store and crazy prices on the resale market. The second story emphasizes the gamesmanship that some parents display to ensure that their child gets the hot toy: e.g., the normally-gentle soul who throws an elbow to prevent a rival from grabbing the last unit; traveling to a store in a different city based on a rumour that it may be in stock; asking a friend who manages the store to put one unit aside before new stock goes on the shelf. These and other tricks that ensure that one parent’s child gets the hot toy even if, uncharitably, it means that somebody else does not. This gamesmanship is needed to overcome the rationing which is needed when prices do not adjust to excess demand.
Gains from Trade
Christmas is about giving and receiving. So, it is worthwhile to understand the benefits to both the giver and the receiver independent of a market price. While a philosopher might discuss how to value intent and “it is the thought that counts”, I note an article published in the leading academic journal in Economics found that the deadweight loss due to the (on-average) poor choice of gifts was about 15 percent. A very old idea in economics explains that, if you want to help somebody from their perspective then it is rarely a bad idea to give cash. Most people are terrible at knowing what their family or friends really want. Giving a gift certificate, and letting the recipient choose, is a more efficient solution: it has more value to the recipient without changing the financial cost to the giver.
Comparative Statics
Christmas Day is always Dec. 25. Thus, supply chains and savings plans have adapted to this “shift in the demand curve” without needing to increase the market price.
If a major snowstorm on Christmas Day makes driving to meet friends or family difficult, the fares charged by Uber and Lyft would increase. How much of that increase is due to the storm and how much is due to the willingness of drivers to drive on that day? Also, since regulations usually prevent the fares charged by regular taxi companies from changing, what happens to their wait times? Characterizing the new market equilibrium (for taxis and Uber and Lyft jointly) takes a bit more thought since the longer wait times for taxis also increase the desire to use Uber and Lyft.
This post is a reminder that economic ideas appear in lots of disguises around this time of year. With a bit of prodding, and help from textbooks, you can find more precise insights into the situations described above.
Now, it is your turn to write.
- Can you think of other examples which apply each of the five basic principles of economics during this time of year?
5 Basic Principles of Economics 
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