COVID-19: The Law of Supply and Demand

Published 6:10 pm Friday, April 17, 2020

As you venture out for essential trips during this pandemic, you may have noticed changes in prices.

From gas getting staggeringly low, to some essential items like meat and hand sanitizer now reaching new territories of costs. The Law of Supply and Demand is a contributing factor.

From this term, when there is a high demand for an item, but a low supply, the price increases. When there is a lower demand for an item and a higher supply, the price is lower.

Warren F. Mackara, an Associate Professor in economics at East Tennessee State University, explained this in terms of prices we have been seeing.

According to Mackara, gas prices are low for two reasons. The first being a price war, and the second being the pandemic.

“When we talk about the oil situation, the price of gasoline, we have an excess supply relative to the demand,” he said. “In the case of oil, there is kind of a price war going on between Saudi Arabia and Russia. A race to the bottom so to speak. Saudi Arabia has been pushing the price of oil down, and for Russia, that is a major source of revenue for their country. They sort of came to an agreement on this. But that is the supply side. On the demand side of it, people aren’t driving as much. They have either been forced to stay off the roads, by local government and forth.”

Mackara said in terms of gas, we have more of a supply than we do a demand.

For prices of necessities, like hand sanitizer and meat for example, the demand side is higher.

“People have gone a bit over the top on this,” he said. “That’s why certain products, of course hand sanitizer and bath tissue have been wiped off the shelves. Everytime you go, you think they have restocked, but they haven’t.”

Mackara said in terms of this supply, the area of expertise delves into marketing. However, he explained that, from his knowledge, that supply chains follow rates of consumption.

“As I understand it, and I will be the first to admit I’m no expert, but what I understand is the supply chains have been set up in such a way they know what typically is the rate of consumption for certain things,” he said. “They pretty much have a process for this. Then we get this really weird situation where there’s suddenly an extreme demand for certain products. They just can’t suddenly change their supply chain to that very quickly. They’re not even sure they want to change it at all because hopefully this is not something that will last in the long run. So hopefully it will be temporary.”

He explained price is a function of the Law of Supply and Demand.

“In some cases, the reason prices are going up is because the demand has increased relative to the supply,” Mackara explained. “The problem with that is when you’re talking about products people find essential, they don’t see it that way.”

While there is no doubt there is some price gouging to be taking place, the idea of it being an entire greed based function occurring with prices is most likely not the case.

At the same time, while prices are going up, other aspects, like wages and people’s services, are going down, for instance those laid off. This occurs when there is a low demand for them.

“The market system is a great system as long as things are good,” he said. “When things are bad, the market system can lead to prices where certain things are too high.”

In terms of normalcy and when things in the economy will regain balance, that remains to be unknown. No one knows what will happen once COVID-19 has slowed, or what “normal” will be.