Exercise 3.1:
So why am I paying $60 for a Christmas tree which only cost $40 last year?

Even those of us who don't keep up with the inflation numbers know that prices have not risen by 50% in the past year; so why are Christmas trees more expensive? This is a question that not only applies to Christmas trees, but to many things that go on the market for a limited time, such as fireworks and children's costumes. Most of these items are not only seasonal, but are associated with specific days of the year. Their price tends to be fairly stable across time, with sudden wide variations occasionally. Why? Is it the case that the sellers of these products are exercising a "temporal" monopoly-we must buy at this time so they have a monopoly associated with the urgency of the purchase? Probably not.

In the case of Christmas trees this year, it is quite likely that the prices will be higher than in previous years. This is a simple case of supply and demand at work. It is true that the number of Christmas trees sold year to year in the United States is fairly stable. According to the University of Illinois Agricultural Extension Service (see http://www.urbanext.uiuc.edu/trees/treefacts.html) there are between thirty-four and thirty six million Christmas trees harvested each year. This year the weather and the forest fires in the northwest (Washington and Oregon produce a substantial percentage of the total with Oregon producing 8.6 million in 1998) have not been favorable for the final growth and harvest of the "mature" trees-it takes six to eight years to grow a tree to the appropriate size for Christmas trees. As a result it is expected that the Oregon and Washington harvests will be well below the expected level. The price of trees should go up as a shortage unfolds. This shortage will translate to the more eastern regions as growers there (Michigan, Pennsylvania and North Carolina are large producers) ship their trees west where the prices are higher. As a result, a shortage will be created in the east and prices will rise all across the country.

Next year the prices should be back down, though not as low as in previous years, since it takes six to eight years for the trees damaged this year to be fully replaced. It may be a good time to look at artificial trees, except that the result will be an increase in demand and … rising prices in that market as well.

As an exercise, draw out the supply and demand curves for Christmas trees in the Northwest and for the country as a whole. Then reduce the supply in the Northwest and trace the resultant changes through that and the whole country graph. Back to the question at the end of the first paragraph; it is probably not collusion on the part of tree farmers-there are over 15,000 Christmas tree farms in the US and any cartel they might form will quickly fall apart-see Chapter 10.

Exercise 3.2:
Why Does the Price of Plywood Increase Before a Hurricane?

When the national weather service predicts a hurricane will make landfall in an area, people have a short amount of time in which to prepare. Weather forecasts are less reliable the farther they are into the future. So, when a forecast hurricane landfall becomes certain enough for people to take action, people don't have much time to act.

To prepare for a hurricane, property owners need to board up their property to help minimize losses when the hurricane hits. Therefore, they demand plywood. They don't have the time to shop around or travel to find plywood. Hurricane preparation results in an increase in the demand for plywood. However, the few days warning is not enough time for suppliers to increase the supply of plywood significantly. Quickly transporting large quantities of plywood into an area at risk for severe weather is very difficult.

The large increase in demand and relatively small increase in supply leads to an increase in the price of plywood in advance of the hurricane.