Introduction
COVID-19 has had a significant impact on different aspects of life, including various markets and economies. The main objective of this report is to study and analyze these impacts in current settings such as supermarkets and consumers’ purchasing behavior. Therefore, the guiding question considered for this analysis is, what are the effects of COVID-19 on markets and Economies? The deductions from the analysis are achieved using concepts from articles and microeconomic analysis techniques learned from ECON1020. COVID-19 found many countries unprepared for eventualities, and as a global pandemic, it affected most operations relying on transport and cross-border exchanges, especially due to weak infrastructure in healthcare systems (Negahdaripour, 2020). Consequently, various economies had to adjust their internal processes to meet the needs of their populace. However, these adjustments affected the price of goods and sales patterns in different stores. COVID-19 affected all the economic agents that currently exist, most of which are recovering from the losses incurred during the peak periods of the pandemic. As a highly infectious disease, it has become a central focus of global economies due to its devastating impacts on health, hence the various economic dynamics.
The choice of analyzing the impact of COVID-19 on markets and economies was crucial as it has tremendously affected the economy. As stated, the disease has affected every business agent globally, and each of them has borne immeasurable stings of the pandemic. Therefore, it is crucial to understand changes in demand and supply, externalities, and market failure to understand what can happen in the future. These ideas are broadly categorized under classical microeconomic theory and Neo-classical theory, which further advance the understanding of the concept of market failure.
Concepts and Model
Classical and Neo-classical microeconomic theories can be understood by observing the trends in markets and economies. The COVID-19 pandemic created an unanticipated driver for market prices for goods and services, causing dynamics in the existing market elasticity. One of the goods that revealed a spike in its sales was masks, as people tried to be protected at all times. At the initial command to the public to wear masks, many used the unrecycled ones, hence bought and used at least a piece each day. Producers of surgical masks and sellers feared that there would be disruptions in the supply chain due to restrictions on imports and the closure of manufacturing plants due to the push to have reduced human interactions. The fears were confirmed when not enough melt-blown fabric used to make the melt-blown fabric mask was experienced for the first time. Therefore, the frenzy of buying masks in large quantities resulted from tremendous uncertainties and irrational agents in various economies in the world.
The increase in buying masks made suppliers unable to meet the demand for the product. According to Murphy et al. (2021), a spike in purchasing a particular product indicates that the targeted customers do not use the purchased items efficiently. In this case, some people could have used more than one mask per day, or several at the same time, to protect themselves and others around them. Roggeveen and Sethuraman (2020) posit that when a product considered a necessity by many becomes unavailable in the market, the situations increase the commodity’s opportunity cost, making the purchasers benefit more from it, hence scalp. Consequently, the product’s price increases due to a decrease in the consumer surplus, but the value placed on the same item increases at a steady supplied quantity. This scenario is illustrated in figure 1 below.
The figure above reveals that over-purchasing of a product results in a shock on the market’s supply side as the suppliers find it challenging to meet the customers’ needs. This makes the demand curve shift to the right while the supply curve remains the same. Therefore, the sellers take advantage of the situation and increase the price of the products, knowing that the demand is high and that the buyers will pay to get the products. On the other hand, sometimes the sellers may not increase the price, but the buyers are desperate and willing to pay for the product at a higher price. It is worthy to note that the increase in demand for masks compelled suppliers to find ways to fulfill the customers’ needs. However, as the supply increased, the demand began to stabilize, hence created a surplus in the market. This scenario reduced the price of masks as sellers began to sell at a lower price to reduce the excess in store. The situation is depicted in figure 2 below, showing a constant demand when supply increases.
Analysis
Analysis of Classical and Neo-classical microeconomic theories can be achieved by understanding externalities and market failure concepts. For example, misinformed agents and illogical behaviors result in increased economic externalities. When people unnecessarily buy large quantities of goods, they cause a shortage for those who need such products. This scenario causes a negative externality, which occurs due to stocked purchases (Varadarajan, 2020). However, positive externality also occurs due to real-time distress in the economy. For instance, during the COVID-19 peak periods, the purchase of surgical masks and hand sanitizers was high and resulted in market gaps, which compelled most countries to import and sell the items. This scenario impacted several areas and people, such as the sellers who had increased revenue, the purchasers who accessed the products, and the health and wellness of society, which improved and helped prevent the further spread of the disease.
The need for surgical masks depicted increased consumer value on the product. This reveals that the demand for the item increased even though the supply was steady since more people wanted to have the masks on at all times due to the mandatory obligation to wear them in public places. Moreover, some bought the masks in large quantities for fear of future shortages. This made it possible for the sellers to hike the prices of each unit of masks, which according to Bradshaw (2020), resulted in some stores making a profit of $189 for each product box. As the demand increased, as shown in figure 3 below, private and public sector costs hiked as more agents used the face masks increased. However, the increase in the price of the item is insignificant compared to the value the goods had on the health and wellness of the people. Therefore, the buyers were willing to spend more money to protect themselves and others.
Market failure is another crucial element that was associated with COVID-19 disease. The pandemic made it possible for various economies to realize that some markets are unsustainable in the face of certain situations. The failure of some face mask manufacturing companies revealed the instability of some previous and presently existing businesses to operate during a global crisis. Consequently, large and multinational organizations must have resources to sustain them through crises such as pandemics. This revealed that the companies that failed during COVID-19 peaks did not put much effort into their resource allocation strategies.
The efficiency of a company to allocate its resources is a crucial factor that needs considering if the company should make a significant profit. According to Decker et al. (2017), businesses that maximize their earnings do so by increasing their allocative efficiency, becoming more prepared to perform well, and survive adverse times such as global pandemics. As shown in figure 4 below, the output of a company reduces; hence the products must be sold at a higher price to sustain it. Despite the struggles experienced by many organizations through the pandemic, various governments enacted policies that enable the smooth transition through the difficult times of COVID-19. Moreover, countries such as the USA provided stimulus packages for employees to make it easier for the companies to keep their workers and allow them to perform their duties at home to curbing COVID-19. China continues to provide the manufacturers with a good environment for producing masks, making the country the largest product producer globally (Broom, 2020). Governments allowed for temporary relief on the economy, making it easier for people and businesses to operate normally and continue to trade on the national scale.
Conclusion
The COVID-19 pandemic has resulted in various economic dynamics around the globe. The analysis revealed that the observed economic changes had reduced the goods such as face masks supplied or demanded by retailers and manufacturers since the producing companies experienced shocks in their operations. However, some opportunities exist, and agents can utilize them to optimize their activities in the market, thus allowing them to thrive in an unprecedented time. The existing negative and positive externalities resulting from irrational behaviors, as those witnessed in the purchase of masks during COVID-19 peak periods, provide crucial information regarding their implications on society. Therefore, agents and communities must shun panic buying and effectively utilize their resources during crises, which rarely occur. During hard times the government plays a crucial role by providing interventions in terms of policies and market boosts to help the society remain efficient and achieve balance in providing basic needs. Consequently, this knowledge reveals that businesses need to learn from the COVID-19 pandemic and braise for a worse situation in the future and understand the need for efficient resource allocation to help society overcome a difficult period with minimal distress.
Bibliography
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