Question

Pick a market and think of a scenario (i.e. some kind of "shock") that will affect supply or demand in that market (but don't actually tell your classmates what will happen to supply, demand, equilibrium price or quantity!). The challenge for your classmates will be to take your scenario, figure out the shock affects supply or demand and what will happen to the market equilibrium price and quantity.

So, to re-iterate. You should make a post to setup your scenario for your classmates. In this post, you probably want to include at least the following:

1. What is the market you picked? For example, you could choose something like the market for bananas, the market for toothpaste, etc. Be creative but also try to be specific!
2. What is your "shock" that will affect the market? Think of some kind of economic "shock" that might affect the market your chose. Does income increase? Does the price of a related item change? Is there a natural disaster? Be creative again!
3. (optional/as needed) Are there any other assumptions about the goods/markets that we might need to know? For example, if income changes we might need to know if we should assume the good is income normal or inferior? Or if two goods are substitutes or complements? Or one good is an input into another?

**wanted to do a topic related to COVID-19

Answer 1

The Corona Virus Pandemic is causing a big head ache in the eyes of the economists as establishments remain shut and companies are unable to operate leading to big losses for firms. As firms lose value, the overall industry slumps and they try to contain their costs by reducing the employment levels in the economy. Thereby, the availability of funds declines grossly for people and they are unable to meet their expenses.

The market, we have chosen for our analysis is that of the Manufacturing industries which operate in most economies and produce goods like mobile phones, automobiles, technological equipment, capital goods etc.

The industry is seeing both a demand and supply shock. The demand shock originates from the fact, that companies and local market remain shut, and there is prohibition on commercial activity which stops production as well. As a result, both the aggregate demand as well as aggregate supply goes down.

The Shock is explained as follows with the help of an aggregate demand and supply graph: -

In the above graph we see two different lines which indicate the demand and supply in the industries. The demand is downward sloping, as with a decrease in price the demand goes up on the same curve.

Similarly, the supply curve is upward sloping as with an increase in price, the supply sees an increase as well. The old equilibrium is indicated as the intersection between the old quantity demanded and the old quantity supplied which Q at price P.

As a result of the lockdown measures, the supply and demand both get reduced and the equilibrium shifts from the old intersection to P1 Q1

It is important to know, that these changes are not caused by a system collapse, such as the recession of 2008, but is the resultant of external market forces. The economy will revive once the lock down opens up as the industry would respond accordingly.

Please feel free to ask your doubts in the comments section.