Economics of Holiday Shopping

As Christmas time approaches, and we look back on our purchases from Black Friday and Cyber Monday, it is important to recognize the economics behind these holiday deals. As many of you are aware, many gifts and products will go on sale during this time of year, supposedly allowing customers to get the "best" deal on presents and gifts for loved ones. Yet, these sale items are not all they seem to be.

Let's first start with some background information on basic goods. Let's say a company sells a t-shirt for $30. Obviously, some of this money goes towards paying workers and buying new materials to manufacture more clothes, but what about the rest of it? An average t-shirt costs about $5 to make, which means the company is overcharging the customer $25 for a single shirt. Once you take out some money to pay workers, let's say another $5, the company still profits a significant amount for only selling one shirt. That being said, what happens when that t-shirt goes on sale?

Now, let's assume the t-shirt still costs $5 to manufacture, but the shirt is now on sale for 50% off! (WOW!) If you think anywhere remotely to how I do, this sounds like an amazing deal. In fact, the company HAS to be losing money if the shirt is priced this low! However, it might not seem as great as you originally thought. Running through the same process, we subtract the $5 it takes to make the shirt and another $5 to pay workers. However, with the initial cost being only $15 this time, the company still profits $5 from that shirt.

Taking a step back, this situation is similar to that of a monopoly setting prices for their good. We can assume that the full-priced shirt is the point above MC = MR. As we know, this is extremely expensive, and it more than covers the total cost needed to continue running the company. Now, we take the sale price, and we start to become more efficient in our spending. Now, let's assume the price is where price is equal to MC, or the point of allocative efficiency. While the price is significantly less than the original price, the firm is still profiting off of each sale. Granted, this profit is less, but it is still a profit nonetheless. So, next time you go shopping for a Christmas present, and you see that sale sign outside your favorite clothing store, remember that a sale is not as great of a deal as you might first assume...