Question

With the outbreak of COVID-19, many people in Hong Kong choose cooking at home instead of dining out to reduce the chance of contacting Coronavirus. At the same time, it is observed that many restaurants have closed down. Given that many restaurants cut their menu prices in this period, explain, with the aid of a supply-and-demand diagram, how the above changes affect the market for dining out meals in restaurants.

Answer 1

Given the scenario, there has been a reduction in demand for the quantity of restaurant meals. That is to say, at the constant prices, the demand curve for restaurant meals has shifted downwards. This will lead the quantity of meals to reduce as well as the price of the meals. Consider the following diagram -

We can see that the initial demand curve D1 and supply curve S1 intersect at E1 to give the equilibrium level of meals demanded to be Q1 at price P1. When the demand curve shifts downwards, this equilibrium is distorted and the quantity supplied is more than the quantity demanded. This causes the suppliers to decrease the price, and also reduce supply, to cut back on their losses. Hence, the equilibrium is established at E2 with the new demand curve D2 intersecting with the supply curve S1, and equilibrium quantity reduced from Q1 to Q2 and price reduced from P1 to P2.