Increased Demand for Tall Christmas Trees
December 13, 2000
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Relevant Review:
   Demand & Supply
Market Adjustment
Substitutes and Complements
   Current Events
Mansion Demand

   The rapid growth in wealth and income among the wealthiest households during the last several years has lead to an increase in the demand for luxury goods, and a resulting increase in demand for complements to these luxury goods. As we noted in an earlier article Mansion Demand (July, 1999) much of this increased wealth is being spent on lavish homes. While not all who have benefited from the greater wealth can afford real mansions, larger luxury homes, condominiums and apartments are demanded by the beneficiaries of this increased wealth who don't quite have Mansion-level wealth.

Demand for luxury homes increases with wealth

   To the right we show a graph relating increased wealth among the wealthiest 10% of U.S. households over the last few years to the demand for luxury homes. Wealth is shown on the vertical axis and numbers of luxury homes are shown along the horizontal axis. As with any luxury good, as wealth increases, the expenditure on the luxury good increases at an increasing rate, giving the wealth-demand curve the shape shown to the right.

   These luxury dwellings often have cathedral or even two-story-high living room ceilings. Those who own such dwellings, and who also celebrate Christmas, tend to demand larger Christmas trees. Tall Christmas trees (8-12 feet or taller) are complementary goods for luxury homes with high ceilings.

   We typically relate complementary goods through the price mechanism, noting that if the price of a good falls it will lead to an increase in the demand for goods that complement it. However, the same effect can work through income or wealth. If incomes and wealth increase, demand will increase for goods that are complements to normal and luxury items, and will decrease for goods that are complements to inferior goods. Thus, Christmas tree lots have seen increasing demand for taller trees over the latter part of the 90s.

Demand for tall trees shifts out

   In any given winter, the supply of tall Christmas trees is most likely perfectly inelastic, or fixed, as shown to the right. Providers of Christmas tress must determine how many trees, and of what size, to cut prior to the selling season. Supply can't be effectively altered within a season. In such a market, total quantity sold is determined entirely by supply, and price is determined entirely by demand. To the right we show the demand for taller trees shifting out from 1994 to 2000 as a result of rising wealth and a resultant increased demand for homes, condominiums and apartments with high ceilings. Naturally, such a shift out in demand will lead to higher prices in any given season.

Supply shift out to new equilibrium

   Christmas trees suppliers are able to recognize the trend so that each year they supply more tall trees than the year before, though within any given year the supply is fixed. This leads to a shift out each year in the supply of taller Christmas trees, as shown to the right. As shown here, the price and quantity of tall trees rises from 1994 to 2000 as demand and supply both rose. If the suppliers had accidentally over-estimated the number of tall trees that would be demanded, the price could have fallen. Trees, once cut, can't be stored for the next year so tree lots will reduce prices to sell all stock before the tree-buying season ends.

Long run supply

   Finally, if we look at the increased supply of taller trees over the years we can infer the shape of the long run supply curve for tall Christmas trees. To the right we have drawn a line through the intersection of Demand and Supply for each year deriving an upward sloping supply curve for taller trees.

   If the trend of rising wealth continues, we can expect the demand for taller Christmas trees to continue to increase. Much of the increase in wealth over the last several years has been driven by growth in the stock market. The recent cooling of the stock market may suggest that demand for taller trees will start to level off for a few seasons.

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