Photo courtesy of welshkaren
It’s Christmas! Well, nearly, at least. And as the madness
of the Christmas season takes hold, consumer willingness to spend increases
significantly compared to the rest of the year. With so many friends and family
members to buy gifts for, the overall level of demand in the economy increases.
It’s a great time for retailers. As consumers spend more,
their revenues increase. In fact, consumers are willing to pay far higher
prices in order to fulfil the social expectations of giving high-value gifts,
at the same time as being rushed off their feet and less willing to spend time
looking for a good deal.
In comparison, the post-Christmas period is a sales bonanza,
seeing equally mad behaviours emerge as people hunt for a cheap deal. Shoppers
camp out and queue for the sales that start at an unearthly hour in the
morning. The USA’s similar post-Thanksgiving ‘Black Friday’ sales have prompted
violent
and sometimes fatal behaviour. It was thought that a fatal
stabbing during last year’s Oxford Street Boxing Day Sales was due to the
retail frenzy.
Firms have begun to take advantage of these very different
markets. By charging high prices before Christmas, when demand is price
inelastic; and offering discount deals after Christmas, when demand is price
elastic; they are able to increase their revenue in both periods. This is an
example of price discrimination: where firms charge different prices in different
markets to maximise their revenue.
Economic theory would hold that this can only be a good
outcome. Is this true?
Comment if you know which famous (and peerless) economist's works the title refers to.
Comment if you know which famous (and peerless) economist's works the title refers to.
The article below explores the phenomenon in more detail:
Vincent
ReplyDeleteIn this article I really like this expression that richer people will use their wealth to buy their wants without having to face this problem with overcrowding on Black Friday and Boxing Day. Although you could see these events as a disadvantage for the richer people because then they will have to pay higher prices in order to get their goods when they want it.
Another point which really interested me is that these events are good for sellers and buyers, as sellers use the advantage to raise their output with the products. Also buyers have the opportunity to get the discounts which can be very good when their income is low.
Price elasticity of demand is the % change in price over the % change in quantity demanded. As price of goods during christmas or before christmas period is inelastic, less marginal consumers will leave the market when price goes up as a result of revenue maximasation. Yet,we also need to consider the elasticity of supply. Suppliers may not have much excess capacity during christmas. They may then require more price to supply more. The ultimate goal of firms are profit maximasation instead of revenue max. Therefore, we need to consider the cost. Profit max is attain when Marginal return euals to marginal cost. Firms may hire more part time workers during christmas time as to practice a higher devision of labour. As a result, cost is lowered due to law of deminishing marginal return.
ReplyDeleteJeffrey Ho (Deps)
Retailers have manage to achieve a perfect balance of being able to cater to the inelastic and the elastic shoppers, so it’s fair and they are making maximum revenue before and after Christmas. Before Christmas the prices are put up because it’s the season of gift giving and showing generosity; Christmas gift purchases are inelastic. People want to bring happiness to others and therefore other family and friends satisfaction, satisfies them. On the other hand those who perhaps haven’t got lots of spending money will save their money for the after Christmas sales when the prices drop significantly as the stores try and get rid of stock to prepare for new stock in the new year. These after Christmas, bargain hunters are elastic shopping; as the prices are cheaper the value of the item seems more significant and is more appealing to the shopper. Therefore the shoppers are also satisfied.
ReplyDeleteAs consumers are aware of the changes of particular prices they can decide when they buy in accordance to their different needs. Christmas time is inelastic because as Claudia says parents do not want to disappoint their children, and friends want to carry through the christmas experience. It is clever on producer side as because the prices are mainly inelastic the producers can charge a higher price in order to maximise their revenue.Those who consider the opportunity cost of buying after or before christmas may decide that the cost(i.e a higher price) forgoes the crowded flurry of uncomfortable shopping the next day. It becomes elastic after christmas as it is time when consumers are looking for a bargain and they may have held off on buying a sofa or more winter clothing until the Boxing Day sale. These people therefore feel that the utility and happiness they gain is worth the crowds. The price discrimination allows producers to gain from both groups while still keeping the consumers in control and content.
ReplyDeleteChanel Sangster (DEP)
During the time in Christmas, the elasticity of demand is inelastic. A great increase of price may just cause a slight decrease of quantity demanded as the inelastic demand states that the percentage change in quantity demanded is smaller than the percentage change in price. Therefore, of course, the firms would like to raise up the price of the goods to earn more profit. Increasing the supply may even lose in profit!
ReplyDeleteHowever, do not forget that different consumers have different thoughts and expectations on the price changes of the goods. Some consumers may expect there would be sales for the goods after the Christmas. They think the price of goods would drop. They may reduce the present consumption. Therefore, the present demand may decrease.
Umar Ahmed
ReplyDeleteSupply may be inelastic as suppliers may not possess the capital to supply the market causing a shortage in supply, this will cause demand pull inflation which is the main problem with any increases of demand. Also as there is a shortage of supply many people will have their wants unfulfilled and a firm not being able to maximize profit causing market failure. In addition, to this the very busy retail stores can become very inconvenient for people and often dangerous in some cases, causing high income earners to spend during off peak periods.
But the advantages will outweigh the disadvantages as any increase in inflation won’t be sustained for the year. Also during this period there is a lot of trade which will only benefit the seller and buyer as the seller will gain profit and the buyer will gain the product desired. This increase in trade will lead to economic growth and (mainly during this period) an increase in unemployment, hence achieving two main macroeconomic objectives.
John Keynes? It is used to described human emotion that drives consumer confidence.
ReplyDeleteBack to the article, I like the fact that people who are willing to pay more and the others benefit from it at the same time. Assuming consumers have a positive time preference, 'rich' people have to pay a higher money price in order to enjoy the goods first. However, higher time costs are involved for those who would like to purchase later for cheaper money price. It depends on their opportunity costs for sacrificing money or time, and therefore making a decision for themselves.
LeightonW
Keynes! Keynes! It's when he talks about spontaneous, often brutally selfish optimism rather than logical thinking! And honestly, although I understand that this may be a good idea economically to have these tremendously large sales, the "animal spirits" will take over in these situations and perhaps is rather uncaring about the consumers to disregard the dangers posed on them by these sales. After all, if the sales kills a consumer, then that is one potential customer dead and thousands more dissuaded from buying your goods due to the crime scene, the fears that they might be next, etc.
ReplyDelete'Animal Spirits' must surely refer to Keynes' term used to describe emotions which influence human behaviour.
ReplyDeleteThe period just before, during and after Christmas gives firms many fantastic opportunities to profit. With Black Friday in America, the low prices cause a frenzy of high demand, so that the firms sell a lot of their stock whilst also fueling consumerism. Then when it comes to buying gifts at Christmas prices can be pushed up massively but still sell vast amounts because the consumers feel pressured by scarcity and time limitations. And even if there is still unsold stock, firms can sell it at discount prices, finishing of their stock in time to prepare for the New Year.
I feel that firms can be very manipulative in terms of "sales". They can raise prices and then "drop" them artificially to give the impression that consumers are making a saving, where they are really paying the normal price. While this is obviously a practice that will continue into the foreseeable future and one that is definitely beneficial to retailers (as consumers buy more products). Considering this fact, consumers are very much taken in by the whole facade, as is evident from the massive rushes at Christmas sales. These huge turn-outs are massively encouraged by what has become a Christmas tradition in its own right, the Christmas sales. Of course, sales do serve a purpose. They allow any surplus stock left over from Christmas (a time where consumers normally buy far more than normal and as such retailers stock more than normal) and so prevents excess stockpiling. Ultimately, while it might be most beneficial for consumers to wise up to the sales facade, even if they do the idea of a sale still encourages them to purchase more and it is unlikely consumers would have the knowledge to know whether something is truly cheaper than normal or whether its price has just been artificially raised and lowered by retailers.
ReplyDelete- James Woodcock
Christmas is a perfect example of culture apparently bending all the rules of economics. people are willing to spend more on things worth less despite the future expectations almost guaranteeing lower prices in January. It would be interesting to see to what extent the demand is changed and at what increase in price people would stop purchasing.
ReplyDeleteAlbert Azis-Clauson
Although consumers have to spend more of their income to get the same goods during this period, this has long term benefits. Many people say that Christmas is a good time for the economy as it boosts spending. In turn, firms get more revenue which could lead to more investment in capital goods.
ReplyDeleteJason Luong
Despite having the highest consumer confidence in 15 months, sales have been slowly decreasing. The UK retail sector was one of the most effected after the 2007 crash, as consumers are unwilling to spend too much due to job uncertainty caused by the recent alarming unemployment figures of 2.5 million. Henry Enos, a consumer expert said ”Retailers will continue to face the challenges of changing shopping habits brought about by the economic climate, but also increasing use of the internet as both a shopping and price comparison resource. The consumer is more educated due to the media society we live in”.
ReplyDeleteWe’re coming to our sixth competitive Christmas is an economic downturn but this time the UK has been battling against the heavy Government cuts and high unemployment. I don’t think retail firms should expect huge demand for their products. Only time will tell, if Santa Claus can drag us of out of our deep hole along with our European neighbours.
Rich Amoah
Economic Prize
Economics Editor of the Broadie
Economicsmate.blogspot.co.uk
Christmas spending is a very extreme example of a shift in demand for goods. It is a positive for firms, as people's standard idea of the price of a good become irrelevant, in the rush for the best gifts, meaning they can charge higher prices. These higher prices doesn't mean raising their prices it could be just not giving a sale up to boxing day. But at the same time one could say that the expectations of future prices, the lower prices in January, would cause a decrease in demand.The extent to which demand increases up to and including Christmas will be interesting to see.
ReplyDelete