Question

1. Consider the market for surgical face masks in Albuquerque which is currently in equilibrium at a price of $3.00 per mask and a quantity of 10,000 masks per week traded.

• Draw a supply and demand curve showing this equilibrium.
• For each of the following cases, explain (verbally and using your Supply and Demand curve) what would happen to the market:
  • The city is gripped by a fear of COVID-19, the Corona Virus.
  • The Centers for Disease Control issue a public notice that surgical masks offer no protection against COVID-19.
  • The University of New Mexico cancels class for two weeks and urges students to return to their homes.
  • The Federal Government offers subsidies to manufacturers and distributers to increase the production and distribution of surgical masks.
  • The City of Albuquerque imposes a price cap of $5 each on surgical masks.
  • Major local retailers impose a limit of three masks per purchase.
  • An informal secondary market for surgical masks develops in order to get around the price and quantity limitations imposed by retailers and government agencies.
  • The City of Albuquerque issues an order cancelling all public gatherings of more than 1,000 people for the month of March.
  • The Governor of New Mexico Issues a price-gouging measure requiring retailers to seek approval for daily price variation of more than 5%.

Answer 1

• If the city gets gripped by the fear of COVID-19 virus, the demand for these masks would be very high instantly, thus increasing the price of the mask and also shifting the equilibrium to the right. (refer the below figure) -
• When the centres release the news that the masks do not provide any protection against COVID-19, the demand for these masks will go down thus lowering the prices of the masks to keep up with the supply and avoiding warehousing costs. Consider the following diagram -
• If university cancels classes for two weeks, the market for these masks would be affected but not to a great extent, the demand would be lowered as some consumers are no longer participating in the market.
• When there is a cap of $5 on these masks, the new demand would be lower than the older one since an increase in the price of commodity results in reduced demand for it.
• When the government offer subsidies for the manufacturing of these masks, the supply in the market would increase and the prices would be lower than before. Refer to the following diagram - ​​​​​​​