Question

In the wake of COVID-19, the Hand Sanitizer and Masks market has seen much higher prices.

1. What shift in demand or supply is most likely to explain this outcome?
2. Sketch a demand and supply diagram and explain your reasoning for each.

1. A rise in demand
2. A fall in demand
3. A rise in supply
4. A fall in supply

Answer 1

Panel (a) represents the case where demand increases more than supply. In this case, price will rise less proprotionately than the increase in quantity of masks and sanitizers in the market.

Panel (b) represents the scene where both demand and supply increase equally. Here, price remains  the same, while quantity increases.

Panel (c) presents a scene where demand increases, but supply falls (in equal proportions here). Quantity remains the same, but price increases.

Panel (d) pesents scene where both demand and supply decreases. (in same proportion). Price remains the same, but quantity decreases.

The question requires a likely scenario where price increases. This interaction between deamnd and suply is seen in panel (a) where demand increases more than the supply. People panic and want to stock up the face masks and sanitizers. If the demand is inelastic, increase in selling price is even steeper because the seller can increase his mark up and charge higher price.