Question

Due to the corona virus pandemic there has been a decrease in the demand for luxury goods especially in the airline industry where revenue has decreased,  a decrease in consumer income and factories have closed due to the virus causing a supply shortage to companies such as Apple and Toyota. Fully Explain this change using elasticity measurements and determinants (price elasticity and its relationship to revenue, price elasticity of supply and income elasticity of demand . Provide graphs and calculations to support your explanation.

Answer 1

Explanation of the change due to Corona virus pandemic using elasticity measurements and determinants:

• Price elasticity and its relationship to revenue

A proper estimation of price elasticity is of great significance for a firms decision making. A firm’s revenue changes as a result of the change in price of the commodity that it produces. Total Revenue (TR) obtained from sales by a firm is calculated by multiplying average unit price of the good with the total quan­tity of the good sold in the market in the given period of time, i.e., TR = PX x QX​ , where ​​​​​​PX is Price of good X and QX is quantity of the good X sold in the market.

From above graph depicting the total revenue obtained from OQ quantity sold at OP price is OPCQ. Here, three things can be understood better:

1. If the demand for the good is price elastic,
   • With an increase in price of the Toyota car, there will be a large fall in sales of salesof Toyota cars leading to decrease in total rev­enue.
   • On the other hand, if the price os the Toyota car falls, the sales of the Toyota car will be increasing so much resulting in rise of total revenue.
2. If the demand for the good is unit elastic, there will be no change in total revenue earned from the sales of the good even with the change in price.
   • For example, with the fall in price of a Toyota Car by 5%, the sales of the Toyota cars will be increasing by 5% whereby the total revenue obtained will remain unchanged
3. If the demand for the good is price inelastic,
   • The sales will be falling with the increase in price of Toyota car but the total revenue obtained from sales will be rising.
   • On the other hand, with the fall in price Toyota car, the sales of the car will be increasing but the total revenue will fall.

• From the above graph, it is evident that the sales across major economies have declined due to the Corona virus pandemic

Here we can asses that the change in the price especially the drop in the price is because of competition among sellers due to fall in number of consumers caused by the Corona virus pandemic which caused many issues such as fall in the income of the consumer which inturn resulted in reduction in the purchasing power of the consumer because of which there is a fall in the demand for goods especially luxuary goods such as Automobiles such as Toyota and Benz cars and Technical Gadgets like computers and Apple products.

• From the above graph, it is evident that the manufacturing activity across major economies in the world have declined due to lockdown.

We can also understand that supply side shock is due to many reasons such as availability of no labour force, no availabiltity of raw material, availability of reduced fuel and power supply, limited or no permission for sales or even sales promotion which have been resulted from lockdown that was imposed only because of the Corona virus pandemic.

• From the above graph, it is evident that the output production across major economies in the world have experienced supply shock due to the Corona virus pandemic

• Price elasticity of supply

From the above graph, it is observed that if the price elasticity of supply is inelastic (Graph-1), then with a change in demand (in our case it is decrease in demand due to Lockdown) will result in a percentage of change in price which would be more than the percentage change in demand (in our sace, percentage fall in demand is less than the percentage fall in price). On the other hand, if the price elasticity of supply is elastic (Graph-2), then with a change in demand (in our case it is decrease in demand due to Lockdown) will result in a percentage of change in price which would be less than the percentage change in demand (in our sace, percentage fall in demand is more than the percentage fall in price)

• Income elasticity of demand

From the above graph, it is evident that the lockdown and corona pandemic has created a plung in employment rate with wich the income levels have gone down that inturn lowered the purchasing power and demand for goods and services.