‘Tis the season to increase Consumption!
The year-end holiday season is a time where people tend to splurge on goods and services as some form of celebration. The increase in demand for many goods and services such as high-end consumer electronics, toys as well as food and fuel during this festive period can be attributed to changes in the non-price factors of demand.
1. Tastes and Preferences
Christmas or winter-specific goods tend to see an increase in demand during the season. In winter, people prefer to stock up on fuel and warm clothing rather than upgrading their summer wardrobe. Even in countries which do not experience winter, items such as Christmas trees and decorations are considered to be staples for the season. (After all, people would not buy and set up a Christmas tree in their homes to celebrate Chinese New Year!) Hence, such changes in tastes and preferences, in accordance with the time of the year, do account for the increase in demand for certain goods and services.
2. Income Levels of Consumers
The working population generally enjoys year-end or performance bonuses, which translates into an increase in income levels of consumers. With an increase in income, consumers tend to spend more on goods and services. According to Deloitte, U.S. households spent an average of $1,536 during the Christmas holidays in 2018. While the average amount spent dropped to $1,496 in 2019, these values still represent quite a significant proportion of total income! Thus, it is no surprise that an increase in income levels leads to an increase in demand.
3. Prices of Related Goods
For many, Christmas involves giving and receiving presents. And what are presents without gift wraps? Gift wraps or gift boxes can be considered to be complements in consumption with gifts themselves. Some shops even provide discounted or free gift wrapping services if a customer purchases a gift from the same shop. (Note that shops can and do also practice price discrimination and product differentiation!) Hence, it is more likely that consumers would increase their demand for goods when the prices of related products are cheaper.
4. Size of Market
The size of the market for goods and services, especially normal or luxury goods, generally increases given that people tend to engage in large-scale gift-giving during Christmas (think, Secret Santa and Christmas consumerism). As a person tends to buy gifts for more than one other person, at least his or her immediate family (some even buy gifts for themselves!), the size of the market increases exponentially, leading to an increase in demand for a variety of goods and services.
5. Expectation of Future Prices and Incomes
Many consumers would expect the prices of goods and services to generally increase over time due to the effects of inflation. Without Christmas discounts and offers, goods are also usually priced at a premium. Moreover, incomes generally do not rise as fast, especially given the context of the current COVID-19 pandemic. Hence, consumers would tend to increase consumption now as they expect to cut back on consumption in the future.
An easy way of recalling the non-price factors of demand is to take the first letter of each factor to form an acronym - TIPSE. During Christmas, when a person is drunk, he or she cannot spell ‘tipsy’ correctly!
The combination of these factors lead to an overall increase in consumption. Also recall that an increase in consumption would lead to an increase in aggregate demand, and a multiplied increase in real national income, thus spurring economic growth.
Of course, sustainable Christmas shopping is increasingly taking root in many parts of the world today. We would expect a slower increase in demand in the years to come, given a more environmentally-conscious population.