Question

Demand and supply. Show in a diagram the effect on the demand curve, the supply

curve, the equilibrium price and quantity of each of the following pairs of events.

a. The market for hand-sanitizers in New York at the beginning of April 2020.

i. The number of Covid-19 cases increases exponentially starting from 1st March 2020;

ii. On March 9, 2020 New York State Governor Andrew Cuomo allowed for state

production of hand-sanitizers.

b. The market for touristic services in Spain in Summer 2020.

i. The European Union imposes travel restrictions to free movement of people (for

leisure) due to the healthcare crisis following the Covid-19 pandemic.

ii. New cleaning protocols require higher standard of sanitization in hotels and public

places to prevent the coronavirus from spreading.

c. The market for real estate in Italy in Spring 2020.

i. Due to the severe restrictions imposed by the lockdown starting from 5th March 2020,

a growing number of families searched for homes with a garden;

ii. The lockdown period produced a GDP fall by 12.4% in second quarter 2020

Answer 1

First of all, please know that I have solved each sub-part of each situation (numbered in romans) independent of the other. This means, when we see the change caused by (ii.) in every bit, we do not assume the existence of (i.). Secondly, considerations like elastic or inelastic demand and supply have also been not taken, because the question does that mention.

Coming to the answers, please refer to the images and explanation below.

1. Market for sanitizers

(i) The exponential rise in COVID cases led to a shooting up of demand. Since March to April is just a month, and not a period long enough for producers to adjust to this change, supply remains as it is. This causes both price and quantity to rise.

(ii) Since the governor has ordered state production now, and since now change in demand is mentioned, only supply increases. Price falls, but quantity rises.

2. Market for touristy services

(i) Travel restrictions and lockdowns will drastically reduce demand (if not completely curtail it). Supply will remain constant, as hotels cannot close down completely. Price will fall, as will quantity. Further, there will also be a situation when the market itself entirely shuts down. So that is an extreme case, where there will be no supply, no demand and no equilibrium.

(ii) Cleaning protocols will not cause any change in demand. What will change is supply, that too only slightly. Supply will reduce on account of those service providers who are not able to adhere to these protocols (for whatever reason, say they cannot bear additional costs) will halt their supply.

3. Market for real estate

(i) Obviously demand has risen, with supply remaining constant. Price rises, as does quantity at equilibrium.

(ii) Now here, there is no direct impact on the real estate market as such. But if we look closely, if GDP falls so greatly, it is indicative of the fact that people's incomes have reduced (since population is going to be the same within such a short span of time). When income reduces, demand for real estate will definitely contract. Price will fall, as will quantity.