For this holiday season, reports say that the glut of Christmas trees these past few years is now disappearing. Christmas trees are expected to be in shorter supply and run about 5% more expensive on average. After finishing advanced microeconomics this quarter, I now realize that this is a textbook case of short-run versus long-run supply.
The reasons for why we don’t have as many Christmas trees this year go back to one probable cause: the Great Recession. During that year, Christmas tree companies were hurt by a shock to the demand curve that led to less Christmas trees being sold for lower prices. If we model the Christmas tree market as perfectly competitive, it follows that each Christmas tree supplier accepts a market price; should that price fall below average variable cost in the short run, the company will exit the market. However, in the long run if price is below average total cost the company will exit. In the middle period are companies who produce above average variable cost (recouping some variable costs and well as all fixed costs), but below average total cost (or in other words, making negative economic profits). Fixed costs include not only land costs, but also the trees planted; it takes 6-10 years on average to produce a healthy, ready-to-be-harvested Christmas tree.
According to the USDA, the number of farming operations growing Christmas trees decreased from 14,700 to 13,000 from 2002 to 2012. That means that the supply of Christmas trees have shrunk recently, which shifts the supply curve left. Another leftward shift of supply can possibly be attributed to drought conditions affecting some operators, who lose trees with shallower roots during drought. Combined, these shifts in the supply curve will result in a higher equilibrium price in the Christmas tree market.
As demand starts to rise from recession-era levels, the price of Christmas trees will further increase, resulting in short-run positive economic profits for Christmas tree growers. This in turn encourages more companies to enter into the market, increasing the supply of Christmas trees and driving down the price to a point where it equals the minimum average total cost of a firm. In other words, if demand holds steady then we should see Christmas tree prices stabilize in the near future.
Andrew Jabara 