The Economics of the Wuhan Coronavirus

Updated: Feb 19

So here I am, in my small attempt to counter the negativity of hoarding with some Economics! But what in the world does Economics have to do with the hoarding of necessities in supermarkets across Singapore?


1. Increased Fears of a Pandemic = Change of Tastes and Preferences + Expected Future Price Increase

Zombie Apocalypse? Rushing to NTUC before it closes? Who can even tell the difference?


The Wuhan lockdown probably weighed heavily on the minds of Singaporeans as they flocked to supermarkets islandwide to stock up on essentials. What if Singapore runs out of food? What if our supplies of essentials get cut off? The fear drove many consumers to hoard everything from toilet paper (seriously?) to instant noodles (I guess a lot of barbers are going out of business when this is over). This shift in tastes and preferences to buy household necessities would certainly lead to a surge in demand, as consumers become more willing to buy these items for fear of not being able to obtain them in future.


Compounding on this is the expectation that prices would rise in a shortage situation, probably contributed to in equal measure by a rise in demand (tastes and preferences) and a supply shortage if supply chains gets disrupted (this can be regarded as a supply shock or government regulation disrupting the import/export of essentials in and out of Singapore). When consumers expect future prices to rise, they would choose to buy more today in to avoid paying higher prices in future, fueling a self-fulfilling prophecy where the desire to avoid higher prices actually precipitates higher prices from the rising demand.


2. Increased Demand + Constant Prices = Snaking Queues



As demand surges from the reasons discussed above, there would be an increase in demand for household essentials such as toilet paper. But with most supermarkets reluctant to raise prices (see point 3), the market sits in disequilibrium as the old price (assumed to be $1 in this case) is below the new market equilibrium price of $5. Students of economics would quickly recognize this as a case similar to that of a price ceiling being implemented. Due to the shortage, unethical individuals who can buy up the scarce good can actually resell these essential goods at "black market prices" (assumed to be $10 in this case), since the true willingness to pay as shown by D1 is higher than the current price in the market. Whenever shortages arise in markets, non-price rationing kicks in; consumers are no longer allocated goods and services based on willingness and ability to pay, but instead based on mechanisms such as queuing (first come first serve), as observed in supermarkets islandwide, or rationing (see point 3 below).



3. Non-Price Rationing: NTUC Responds with Purchase Limits


Image Credit: Mothership (https://mothership.sg/2016/12/remember-when-singapores-taps-ran-dry-for-10-months/

)


Okay things are not so dire, and NTUC has swiftly restocked

all the shelves despite the weekend madness (mad props to all the employees who sacrificed time and sleep to work OT!). What is more important is that they have implemented some form of rationing to ensure enough supplies go around: maximum of 4 packs of paper products, 4 packs of instant noodle and 2 bags of rice (Read more here: https://www.channelnewsasia.com/news/singapore/coronavirus-fairprice-purchase-limits-paper-rice-instant-noodles-12412538
).


This is a textbook case of non-price rationing when shortages arise. Since quantity demanded exceeds quantity supplied as shown in Figure 1 above, not all consumers are able to buy the products that they want (as seen by the numerous consumers who are confronted with empty shelves). And since NTUC is not raising prices to get rid of this shortage, the only way to ensure everyone can get what they need is to limit the maximum purchases, a form of rationing, rather than relying on a first come first serve basis.


Why then shouldn't supermarkets raise prices to get rid of the shortage in these surges in demand? The reason is probably two fold. Firstly, NTUC as a government-linked entity would have non-economic considerations, such as the need to keep necessities affordable for the sake of equitability. Raising prices in light of surging demand means that households would face higher costs in buying basic necessities, and lower income groups would bear the brunt of it as they see the largest erosion in real incomes (purchasing power) as prices rise. Secondly, letting prices rise means that not only do consumers have to pay more generally, it also means that the goods only goes to those who are willing and able to pay. From figure 1, this means squeezing out the consumers who want to buy the goods at $1, until the equilibrium quantity falls to Qe with a new equilibrium price of $5. Needless to say, the people who are likely to get squeezed out from Q2 to Qe are likely to be lower income groups who have less purchasing power.


Conclusion


While the mad rush for essentials since DORSON Orange was announced is certainly disconcerting, the response thus far from the authorities, as well as NTUC, our largest supermarket chain, has been nothing short of commendable. Often lauded as an economic miracle, it is safe to say that Singapore's response to the virus outbreak certainly reflects a good, sound grasp of the economic impact of the outbreak, and sensible implementation of economic policies to manage the situation.

© 2016 BY ACE CLINIC EDUCATION. PROUDLY CREATED WITH WIX.COM

t.ang@aceclinic.sg   |   7A Thomson Ridge Singapore 574636

  • Black YouTube Icon
  • Black Instagram Icon
  • Facebook Basic Black