Question

All students are expected to read the following article, reproduced below, prior to attempting this task: Ward, M, and Chrysanthos, N 2020, ‘’Higher than usual demand’ for toilet paper in NSW supermarkets’, Sydney Morning Herald, 26 June.

'Higher than usual demand' for toilet paper in NSW supermarkets

Premier Gladys Berejiklian has asked shoppers to remain calm after reports of bare toilet paper shelves in NSW following the reinstatement of product limits in Victorian supermarkets.

Toilet paper was in short supply at Coles and Woolworths at Roselands in Sydney's south-west on Thursday, the Herald has been told.

Posting on social media, shoppers also complained of empty shelves at Coles Merrylands and Woolworths Leichhardt in Sydney, as well as Coles Toronto in Lake Macquarie.

On Wednesday afternoon Coles, Woolworths and IGA said they would reinstate product limits for toilet paper, hand sanitiser, paper towels, flour, sugar, pasta, minced meat, long-life milk, eggs and rice at all their Victorian stores.

Coles, on Friday, reintroduced one-pack purchase limits for toilet paper and paper towels across all of its stores, including Coles online.

"We ask that customers continue to shop normally so that everyone can have access to the food and groceries they need," a spokesperson said.

Costco, which has stores at Marsden Park, Crossroads and Auburn, has also reintroduced a one-per-person limit on its toilet paper packs nationwide.

It is believed the panic buying, which was witnessed earlier in the pandemic, is being caused by an uptick in coronavirus cases in Melbourne over the past week.

Victoria reported its ninth day of double-digit case growth on Thursday, with 33 new cases.

NSW Premier Gladys Berejiklian said on Friday that shoppers need to "stay calm" as there was no need for items to be stockpiled.

"Please continue to maintain your calm; continue to do what you've been doing – NSW is doing incredibly well," Ms Berejiklian said, adding that she didn't "blame" people for being concerned as product limits were reintroduced in Victoria amid an uptick in cases.

"We all have to be on our guard, but we certainly, certainly don't need to change our normal buying habits. So please continue with your normal buying habits, there's nothing to worry about."

A Woolworths spokesperson said they had seen "higher than usual" demand for toilet paper in parts of NSW, and were monitoring the situation.

“We’ve seen pockets of higher-than-usual demand for toilet roll across parts of NSW [on Thursday], but not anywhere near the levels we saw in Victoria," the spokesperson said.

"We’ll keep a close eye on demand over the coming days. We continue to ask customers to buy only what they need, as there is plenty of stock to replenish our shelves.”

Additional Recommended Reading:

The following is a list of additional readings that students may find useful when attempting this task: The CORE Team, (2020), The Economy: Economics for a changing world, https://core-econ.org/theeconomy/?lang=en, Chapter 8.

Parkin, M, & Bade, R 2016, Microeconomics: Australia in the global environment, Pearson Australia, Melbourne, Chapter 6. (Available online at https://multisearch.mq.edu.au/permalink/f/3e34du/MQ_ALMA51195988050002171)

Questions:

1. Using the demand and supply model:

(a) Illustrate the market equilibrium for toilet paper before the pandemic.

(b) Explain the impact of the COVID-19 pandemic on the market for toilet paper. Illustrate this on your diagram from part (a).

(c) Explain the impact of the restrictions brought in by supermarkets on the market for toilet paper.

Illustrate this on a new diagram.

2. Evaluate the outcomes in the market for toilet paper in terms of Pareto efficiency, fairness, and the effect on the consumer surplus, producer surplus, and deadweight loss if:

(a) no restrictions are imposed by supermarkets.

(b) purchase-limit restrictions are imposed by supermarkets.

Include appropriate diagrams to illustrate your answers.

3. Suggest and explain two other ways the problem in this market could be solved. Evaluate these alternative solutions in terms of Pareto efficiency and fairness

Answer 1

1 a) Market equilibrium for Toilet papers before the pandemic is shown in the following figure.

Toilet paper is a normal good which has a downward-sloping demand curve and upward sloping supply curve. The point of intersection between demand and supply is the market equilibrium. The market equilibrium decides the equilibrium quantity and equilibrium price. In the above figure, at the equilibrium point e, the equilibrium price is Q1, and the equilibrium price is p1.

b)  As mentioned in the article, the demand for toilet papers increased and the supply of toilet paper decreased. This is illustrated in the following diagram.

Due to the pandemic, the demand for toilet papers increased due to the panic buying of the customers, and this is shown by the shift in the demand curve from D1 to D2. The article also mentions that the supply for toilet papers have decreased at Coles and Woolworth. The decrease in supply is shown by the shift in the supply curve from S1 to S2. As a result, the equilibrium has shifted from e1 to e2. The shift in equilibrium caused the price to increase from P1 to P2 and the quantity decreased from Q1 to Q2. It shows that due to the pandemic the price of toilet papers has increased and the quantity has decreased.

c) The article shows that a quota was imposed where one person can buy one roll of toilet paper to reduce the more than proportional increase in demand for toilet papers. The imposition of this quota is shown in the following diagram.

In the above diagram, we can see that as a result of quota (one roll per person), price increases from P1 o P2. The stores set a restriction on the quantity and the price changes as well. The consumer is willing to pay P2 amount for Q2 quantity. As the producers notice that consumers are willing to pay a higher price, they increase the price to P2. The portion ABe is the dead weight loss due to quantity conrol