Question

Explain what the non-price determinants of demand and supply are and then discuss in detail the critical role that price plays in ensuring that markets reach equilibrium. Explain how the Covid-19 crisis impacted the market for hand sanitizer, toilet paper, and canned goods and how would the market normally respond to these changes. What could be potential negative consequences should the government have mandated rationing of these resources?

Answer 1

The non price determinants of demand and supply include

i. Price of related goods: Related goods are complements or substitutes of the given good. When the price of these goods vary, the demand of the given good also varies.

ii. Income of the consumer: More income of the consumer will enable the consumers to buy more of a good given that the good is a normal good.

iii. Number of buyers of a commodity: More the number of buyers of a commodity, more is the demand for that commodity.

iv. Nature of the commodity: The nature of the commodity, i.e., the commodity being a normal, luxury or a necessity will also affect its demand.

v. Tastes and preferences of the consumer: If the consumer has a strong preference for a commodity, he will prefer more of it.

Now, price plays very important role in reaching equilibrium. The price of the commodity enables those consuners to buy the good who can afford to pay it. On the other hand, suppliers will supply a given quantity of good at the particular price level. When the the price and quantity demanded of the consumers become equal to the price and quantity supplied by the producers, equilibrium is detetmined in the market.

Due to COVID 19, the demand for the items like sanitisers, toilet papers etc. increased shifting the demand curve in the forward direction.

Normally, the increase in demand leads to increase in equilibrium price and equilibrium quantity of the good in the market.

If the government has resorted to rationing of these goods, it would have created problems like black marketing or hoarding of these goods. Another negative effect is that it reduces the equilibrium quantity being sold in the market.