600 words, about 5 minutes.
Watching grocery store shelves slowly empty is a little unsettling, I’ll give you that. But, please remember the shelves are not running low because of decreased supply. Nothing has changed about that! We know this because prior to the COVID-19 news there was plenty of toilet paper and frozen pizzas on store shelves. Those items weren’t in short supply. Rather, the empty shelves are due to a temporary sharp increase in quantity-demanded. In fact, often when people talk about demand in everyday conversations they’re really talking about quantity-demanded without knowing it. Demand and quantity-demanded are completely different concepts.
Let me illustrate. Consumer preferences haven’t changed, we still value cleanliness and sanitation the same as we always have. Thus, paper towels and hand sanitizer are still utilized to realize those values the same way. In addition, there have been no recent popular substitutes for either item enter the market. Conversely, there is no intrinsic quality about either item that suddenly became so appealing as to cause people to clear the shelves of them. If any of those reasons were the case there would indeed be a change in demand, and it would take suppliers a little longer to adjust. There are other things effecting demand, but those are longer-run factors than a recent news cycle has the power to effect.
Because of the recent news cycle, people are buying more at the same price. So, in economics we say the quantity-demanded has increased, not the demand. Suppliers are scrambling to catch up with the temporary increase in quantity-demanded, and will do so with very little increase in price. Capitalist markets are great at absorbing these short-term shocks.
The good news is most people are now well-stocked. Therefore, the quantity-demanded for groceries will actually decrease below normal levels this week (3/16-20) or next. This will allow supply to catch up, and supermarket shelves will be full once again. In fact, they’ll be temporarily overstocked. When consumers see that along with the initial uncertainty of the COVID-19 pandemic wearing off, they’ll relax again. They’ll realize supply has not changed and there’s no reason to panic anymore. All the items they have been purchasing most of their lives are still in normal supply.
Economically speaking, the reason for all the panic is because two of the most fundamental principles in the discipline have been put to the test. First, there is an absence of reliable information regarding the focus of the recent news cycle. The reasons for that are beyond the scope of this essay. For economic purposes, it is what it is. Consumers aren’t sure what to do, so they overcompensate for what they think will best prepare them. Second, the most basic of classic economic assumptions has been discarded. THE most important tenet allowing economic models to predict and explain consumer behavior is the notion consumers always behave rationally. They usually do except when the first reason happens. Consumers usually have enough information to make rational decisions they feel will best “maximize personal utility”, as us economists say. This past week saw people deprived of information, and now there’s no more toilet paper on the shelves. Why toilet paper was the first to go is an entirely different discussion.
I’m confident things will settle down this week. It’s indeed frightening when our daily lives are interrupted like this. I cannot think of a time since 9/11 when there was more social and economic shock. But, when I look at everything through economic lenses, I know things will soon be back to normal. I hope this essay calmed some nerves and put things into better perspective for some of you.