Question

Once the nature of coronavirus became apparent, health recommendations included regularly washing hands with soap and water, or using hand sanitiser. Shortages of hand sanitiser were common in supermarkets and pharmacies, both domestically and overseas. To address these shortages local hand sanitiser producers added overnight shifts to their production lines, and other companies, such as the Bellerine Distillery, started making hand sanitiser. Use the tools of supply and demand analysis to explain the sequence of events in the hand sanitiser market that might have created a shortage. Specifically, identify which of the determinants of demand and/or supply were affected. Explain the impact on the market price and quantity as the market adjusts/reacts to the shortage, along with the process of adjustment. Is the end equilibrium price likely to be higher or lower than the initial equilibrium price? What about the final equilibrium quantity?

Answer 1

With the wake of Covid 19, the Direct instinct of the individuals were to take necessary precautions , which was the role of alcohol based sanitizers. Covid 19 has a tendency to spread when a person comes in direct contact of the affected person . Hence other precautionary steps like use of handwash after some time interval were also taken. Keeping in view all these advisories and precautions , the first reaction of people in panic was to over compensate for their sanitizers and soap requirements. This was an example of announcement effect . Now everybody wants to stack up these goods and producers have less time to respond. Hence given demand and supply levels, the demand rises to D2. ( Given in diagram). This lead to rise in prices to P2 along with quantity consumed increasing to Q2.

The quantity being supplied was limited hence due to high consumption rate and low production rate, the supply shrinked to S2. The quantity now supplied starts falling from Q2 .

Now to maintain the quantity atleast at the initial levels , the producers reacts immediately and rise their production. This adjust the supply atleast to the level of earlier production level Q2 but at higher prices because demand is very high.

Gradually with supply increasing more ( as domestic players have additionally adding to the supply, the supply S3 < D2, hence quantity supplied is still high (Q3) but prices are not lowerP4 . This is the final equilibrium 4 for the domestic market.