Question

For the sake of this question, let's assume that 50% of the surgical masks in the world are manufactured in Wuhan, China. The recent coronavirus outbreak has caused much, if not all of this manufacturing activity to be suspended for some indefinite period of time. At the same time, fears of a global pandemic have altered demand for surgical masks. We know that surgical masks are a normal good.

Using economic terminology, discuss how the equilibrium price for surgical masks is likely to react in this scenario. How might the short-term own price elasticity for masks be affected? Why?

Include a graph in your answer to illustrate the ways in which supply and demand interact to effect the changes in equlibrium price that you believe are likely to result. You may embed the graph in the text box on McGraw Hill Connect, or you may send a copy of it to me via email. If you chose to submit a photo of a handwritten graph, please be sure that it is legibly written and labeled.

Answer 1

Equilibrium is determined when the demand curve and supply curve intersect at a point.

Since, manufacturing has reduced , therefore supply of surgical masks will face a constraint. This will cause the supply curve to shift leftwards.

The recent outbreak of covid-19 has increased the demand for surgical masks as people are now more concerned about their safety. This will cause a rightward shift in the demand curve.

However, surgical masks are now more a necessity good hence the price elasticity of demand curve will be relatively inelastic. Even if there is a price rise, people will still buy masks and percentage drop in their quantity demanded will be less than percentage change in price rise.

Moreover, due to covid-19, increase in demand will be more than decrease in supply of masks as people are very much cautious about their health.

As shown in the above diagram, shift in demand curve is greater than shift in supply curve.

This will lead to rise in equilibrium quantity and equilibrium price of surgical masks.

Equilibrium point has shifted from E to E1.