Answer to Question #242655 in Economics of Enterprise for John

Question

The fear of nationwide lockdowns due to the current pandemic has pushed many consumers into “panic buying”. Critically evaluate this statement and use demand and supply analysis to analyse the possible impact of panic buying on market prices.

Answer 1

Panic buying is a situation where consumers want to purchase a lot of commodities at once out of fear of either price hike or shortages of supply. For example, the covid-19 pandemic put the fear of national-wide lockdown into the mind of people. Lockdown causes closures of shops, markets, malls, etc. In this situation, consumers want to stock up the household items as much as possible. This led consumers to purchase all their household items and groceries in a bulk.

Demand for certain goods (like normal and necessity goods) rises in the market. The rise in demand for those goods, the supply is fixed in the market, pushes the market prices up. In the below diagram the initial equilibrium occurs at point E where the initial demand and supply curve intersects. Due to the panic buying behavior of consumers, the demand for goods rises in the market. The rise in market demand causes the initial demand curve to shift upwards. Given the initial supply curve, a new equilibrium occurs at point F. At this new equilibrium, both price and quantity of goods rise.