Tuesday, December 24, 2013

Its a good investment to buy great gifts

On the news last night I saw a guy saying that gift giving at Christmas made bad economic sense. He may have been right in saying that if a husband and wife each went out with the money to buy their own gifts, they would get something that would be more useful during the following year. He seemed to feel that there should be a role for exchange of pre-loaded debit cards as X-mas gifts. Bah! Humbug!

Look at the standard supply demand curve I have posted above. The red line reflects the prices people are willing to pay for a product. Essentially, people are ordered in a list of decreasing willingness to pay. For any quantity, all the people symbolized to the left of that quantity on the red line would be willing to buy at the price identified on the y axis.

The green line in the same sense symbolizes the willingness to sell. For any specific quantity on the x axis, all the people to the left would be willing to sell at that price.

The market clearing price is that where no additional buyer is willing to pay more, and no additional seller is willing to sell for less.

Now any buyer who is willing to pay more but buys at the market clearing price gets a "consumer surplus" -- he/she is getting a product he/she values more than it costs. Similarly, any seller who is willing to sell for less but sells at the market clearing price gets a "producer surplus" -- he/she is getting more for the product than he/she is willing to sell if for.

The point is, the value someone ascribes to a product is a function of the person, not the product. That is the way that the economy works.

An Example

Think about a husband who for some reason is unable to shop for a present for his wife, but asks his adult daughter to shop for a gift that he will make to her mother. He says, I am willing so spend up to $100 for a nice gift, and I will give you $20 to do the shopping. Thus the value to him of giving a nice gift to his wife is $120. Say the daughter refuses the pay for shopping (since she likes to shop and would be shopping during the season anyway), and buys a gift for $75. Now Dad has a $75 present and a $45 consumer surplus.

Now think about the wife. Of course she might return the present for a store credit, and go buy something with the credit that she likes better. Then she gets something she values at $75 and she gets an added consumer surplus of what she would be willing to pay for that product minus the $75 -- say $30. Thus the family for a total investment of $75, gets a $75 product plus a $45 consumer surplus for the husband and a $30 consumer surplus for the wife.

Moreover, if by some chance the gift should strike a sentimental chord, and the recipient values it above any possible value for an exchange, that further increases the value to the family.

Now I enjoy shopping for my wife's Christmas present, and as far as I can see my wife just enjoys shopping. (She will go out for a morning shopping with a friend, buy one thing, and then return it in the afternoon. Why would she do that if not for entertainment?) So there might be more benefit to us for doing the shopping.

Finally, think about the following scenario. A family has the custom of gathering together on Christmas Eve to exchange gifts. This Christmas all are present on the 24th except Dad, who is trying to get back from a business trip. He gets in to the local airport in mid afternoon, the last flight in. There is a blizzard.  It is going to be almost impossible to get home for the gift opening. The airline will, in the Christmas spirit, put him up at the airport hotel, paying the bill. Alternatively, he can get a taxi driver to make the trip home by paying a big bonus fair. How much should Dad offer? If he would pay $100, then he values the experience of exchanging gifts on Christmas Eve at that amount. That value too should be included in the valuation of the gifting. And of course, his wife will also value the experience of face to face gifting at the big event.

There is a big economic surplus to Christmas gifting in the family.

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