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Supply and Demand: The Effects of Covid-19

Entertainment, retail and beauty companies were forced to remain closed in order to reduce physical contact and prevent the spreading of the virus. This was for the benefit of our communities, but it has not been so kind to our economy. The closure left many businesses facing financial and operational challenges due to the lack of demand for their services or products.

Supply and Demand

The basic laws of supply and demand revolve around the concept that a Good’s value will increase if it has a low supply and high demand.

According to psychologist Robert Cialdini “a product becomes more attractive when their perceived availability is limited” (1984). This creates a psychological need for the product in the consumers’ mind.

Take Starbucks for example: its infamous festive drinks are only around for a short period of time throughout November and December. This low supply ultimately creates a higher demand and the value of the products increases. This type of demand became all-too apparent during the Covid-19 outbreak.

In the lead up to lockdown, reports showed that the demand for essential items rose exponentially. Toilet paper, pasta, flour and milk, are just a few of the products that had a lower supply than what was in demand. Consumers were unsure of when the lockdown restrictions would ease, and wanted to be prepared for any scenario. So, as the supply decreased the demand increased and businesses were able to make a higher profit.

Non-essential business owners, however, were not so fortunate. From the perspective of many consumers, non-essential items were now unattainable or considered a luxury with a high value due to a change of income – such as redundancy, temporary salary reduction, or unemployment. So, in conjunction with not knowing how long the outbreak will last, the principle shifted and both the supply and demand were decreased. These businesses were unable to make a profit, with many unable to stay afloat, causing a significant number of businesses to fall into administration or permanent closure.

The future of the UK economy is unclear but with restrictions slowly easing in the UK, we may soon be able to begin reparations and build it back up to what it once was.

Interested in learning more about business? Why not take a look at some of the Business courses we offer at Northumbria University London Campus.

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