Demand and Prices
Before talking directly about gifts, we have to talk about how Demand influences prices.
It's pretty simple, in the short term, more Demand means higher prices, which sends a Price Signal to producers indicating that Consumers want more of that product!
Giving Gifts
When we buy a gift, we don't intend to use it ourselves. As such, the price we pay for it is not correlated to how much we value the product or service we're buying.
Instead, it's connected to how much we think it's worth for someone else.
Example
If we buy our loved one a very cliché box of chocolates, we might not care if we are overpaying, because the receiver of the gift will enjoy it a lot!
The problem
If we over or underpay for a good or service, only based on our estimate of what someone else likes and dislikes, we are not paying what the real Consumer of that product would pay, giving a misleading signal to producers.
Christmas
This happens on an enormous scale during the winter holiday season when people are buying and receiving many gifts.
A few days after the festivities there are many returns, which are essentially an avoidable inefficiency! They could have been prevented if people just bought gifts for themselves!
Conclusion
Now you have the perfect excuse if you don't have any gift ideas for your friends and family!
Now, for real, do you think that gifts' impact on the Economy is large? What about in the luxury goods industry? Leave your opinions in the comments!
Thanks for reading!
Remember to Upvote and Share, so that I can keep making many posts per week!
Take a look at my last posts, about Price Manipulation: