In: Economics
written and graphical analysis of the Covid outbreak in terms of Aggregate Supply and Demand. Specifically,
- Is the pandemic a supply shock or demand shock? Why? (You can tell by the changes in prices, employment, and GDP)
- If the economy self-corrects over time, what would happen to the above variables? Why? (Discuss how SRAS would change)
The Corona Virus Pandemic is causing serious concerns among economists as the economic effects of such a down turn in both supply and demand can grievously cause a lot of problem for the entire global economy.
The Demand for Goods and services has seen a rapid decline as establishments remain shut to control the disease. Due to the shutdown of the establishments, the supply side has taken an equal hit.
It is widely indicated by economists in their analysis that the Pandemic has led to both demand as well as supply shocks. This is because it is not a structural shift in the economy but rather caused due to factors which have never been seen before.
The prices of goods and services is declining as suppliers are trying to reduce their losses on one hand and on the other, still we are unable to fetch any demand in the economy despite the prices declining as establishments except for those that provide essential services are shut indefinitely in some states and countries.
The same can be explained graphically as follows: -
Her a well labelled Demand Graph and Supply graph indicate a shift in equilibrium. The Initial Demand changes to reduced demand, and the Initial Supply Changes to Reduced Supply. Accordingly, the Quantity Levels which also indicate the Gross Domestic Product or the total goods produced in the economy, decline sharply. The resultant is a decrease in the Price of the goods and services being provided, and the entire equilibrium shifts.
The price here changes from P to P1 and Quantity changes from Q to Q1 respectively.
Again, if there is correction in the situation, the reverse effect would take place and the Short Run Aggregate Supply which is indicated in the above graph as Initial Supply would return back and thus change both demand and price leading to prior equilibrium in the economy.
Please feel free to ask your doubts in the comments section.