Every year, a month before and after New Year (which is 21 March in my country) we have a high inflation up to 30% including nearly all commodities and services. Why? Perhaps the direct and first answer coming to mind is because of high demand of consumers for commodities before New Year. This is partly true but it is not all the story for my country.
According to above answer, the ministry of commerce performs a policy to inject the highly demanded commodities (highly demanded for New Year) into market (think about supply law) in order to keep prices constant. Does this policy works? No, I think the second answer now is “expectations”. Years after year consumers and sellers has used to face higher prices before New Year so they form their expectation. We have another reason to have higher prices before New Year in my country. I call it traffic of changes in prices which again form expectations.
Every year when we get close to the end of the year a committee will decide how much to increase the minimum salaries for employees of government and other sections for the next year. Another committee will decide how much to increase the price of fuel which has an important role in transportation cost including public transportation and transportation of goods across the country. Another committee will decide how much to increase the price of natural gas (used by households), electricity and other utilities. I call this mechanism “Shock trapy”. Why? The purpose of this once increases in prices and salaries is to avoid persistence inflation. It is assumed by officials that when you increase all prices once like a shock we will have a sudden inflation and then during the year everything will be OK. Is this true? I don’t know. We are going to try dividing these changes across months of years to avoid expectations to form only for New Year. If we assume rationality of people I think this will not be useful in long term and the ultimate solution is to let invisible hand to work but is invisible hand successful in regulating market even for New Year? (This is like a cycle, we are back to first point)
4 comments:
During Christmas break, in Italy at least, prices increases because firms know people will get Christmas presents during November and December..even if people knows that prices will increase, they are used to get presents during the period before Christmas..this is an rational/irrational behavior partly due to some reasons: - if you get a technological present is better to buy it on Christmas' time - like November December (technologies changes happen fastly); - another reason is an economical one: most of the working people get the "13esima" in December..which is an extra income (in December people get the usual income plus "13esima" that is like two months income instead of one) which, usually, people use to buy Christmas presents and some taxes; - another reason is that firms offer Christmas related staff only during Christmas period (if you want to buy Christmas presents related to the period you have to wait for December) - a last reason is pretty a free time reason and an atmosphere one: people like walking during weekends buying staff before Christmas..is like a tradition..!! Buyng something during summer or September (October) is something like "It's strange buying something for Christmas in summer..I prefer walking during Christmas and make my choice in that period!!"
For these reasons..even if people knows prices will increase (I mean they are "rational in mind", in the sense that they perfectly knows what will happen in terms of prices)..a big share of people will get the present in December or at the end of November..and not before!!!
Even if people get expectations about prices increase..a share of population judges better to buy Christmas presents during Christmas period..and firms perfectly knows it!!!
Ciaoo
Domenico
you are right but something is strange. Christmas gifts are those which have (demand)elasticity greater than one so if sellers bring down the prices should have more income unless we assume that Christmas presents are necessary goods which in this case elasticity is less than one and an increase in price will bring higher income. I think before new year and Christmas commodities change their elasticity and become more necessary good because as you said people are obliged to buy presents. A simple conclusion: elasticities are dynamic!!
People do not want to make store of their flats and houses, and at the end to forget where they left Christmas gifts bought 5 months ago. People have limited capacities to store material things and to store and process information. Price elasticity of demand is low but if the price is very high in this period people will choose to store in the next perod. So, the difference in price will be equal to "costs of storing".
Slađana, your point is right: storage problems can exists but not for everyone and it is something that depends also on houses sizes and preferences of consumers!!
Vahid you are right: I think elaticities are dynamic (i.e. the demand of these goods CHANGE OVER TIME)..since these goods (Christmas presents) become important only in November and December, their elasticity modifies during time and they become "necessary" goods (or at least much necessary then before..)!!
Bye Domenico
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