In: Economics
First let us see what kind of shock the Covid-19 pandemic is. This is a short term demand shock. Due to the pandemic and the consequent shut downs, the demand has gone into a downward spiral. People are not buying the same products they were before.Their priorities have also shifted towards healthcare and finally, as people get laid off and economical output goes down, the incomes are going down further resulting in a demand shock.
Such short term shocks result in lower profits and higher costs.
In case of Aboitiz, we can see that
In the short run
Average costs will be up- This is because as economy goes in shut down or shifts priorities, supply and transportation costs will increase. To make one unit of any product now will cost more than before. So, average costs will increase.
Total costs may increase or decrease- It depends on the production level. If the production level is still same as before, then total costs will definitely increase. But if the total production is being reduced due to lower demand, then the extent of reduction in production will decide if the total costs increase or decrease. The higher the production reduction, the higher the chance of reduction of total costs.
Profits will be down. This is mentioned in the article clearly. Aboitiz posted a drop in income to the tune of P2 billion. This is bound to happen as average costs increase.
In the long run, the economy and demand will be back to its natural equilibrium and the profit, costs etc should be back to its normal level. Demand shocks are usually temporary and economy always goes back to its long run average level. This will happen again and in the long run everything will be back to the old level.