Question

Economics:

When the Covid crisis hit, shortages of hand sanitizer (and other products like toilet paper) were observed. Present a supply-demand analysis that explains why these shortages occurred, and then further explain why we would not expect the shortages of hand sanitizer to persist if the price adjusts.

Answer 1

A Market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity supplied. In this situation, consumers won't be able to buy as much of a good as they would like. In response to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply. The increase in price will be too much for some consumers and they will no longer demand the product. Meanwhile the increased quantity of available product will satisfy other consumers. Eventually equilibrium will be reached. This happened in case of hand sanitizers and toilet paper etc.

In the above figure quantity demanded and supplied are shown on horizontal axis and price is shown on vertical axis. Initially the equilibrium for hand sanitizers exist at E where demand and supply are equal. When demand rises and is more than supply , as per law of demand price rises to P1. At this price, demand falls and equilibrium is achieved at E1. At E1 and P1, quantity demanded falls from Q to Q1. The difference between Q1 and Q is the shortage for hand sanitizers. As the price rises demand will fall and equilibrium will be achieved again where quantity demanded is equal to quantity supplied.