MANAGERIAL ECONOMICS ASSIGNMENT

1. Impact of COVID-19 on domestic supply due to disruptions in international supply chains

Manufacturing industries worldwide are the backbone of the global GDP. To curb the spread
of the dangerous virus called COVID, all governments across the world imposed a lockdown.
This severely affected the availability of labour to organizations, which in turn were forced
to scale down or even shut down their operations completely. India is home to one of the
highest exporters of raw materials and importer of items that are required to continue the
production of intermediate and final stage finished goods. India imports around 6000
commodities from 140 countries and has a trade deficit with China- the ground zero for
COVID. Many Indian sectors like automobiles, pharmaceuticals, electronics and chemicals
depend on the continuous running of manufacturing units in China for their survival and
shutting down of these factories in mainland China as part of the measures to combat the
virus has affected these industries severely back home to increase in the supply lead time. In
addition to this, the measures taken by the Indian government (imposing of the strictest
lockdown) resulted in a sudden starvation of labour at manufacturing sites across the
nation. Along with these two factors, COVID hit the financial markets in brutal fashion
resulting in the weakening of the Indian Rupee, which means that sourcing or importing
goods would get costlier for the country in the near future as the government battles to
steady the ship.
Supply classically depends on
(1) improvement in technology
(2) reduction in price of commodities used for production and
(3) favourable weather (in case of agriculture).
Disruption to the financial markets and international supply chain by COVID resulted in (2)
getting affected, resulting in the domestic supply getting hurt. In addition to this, some of
the barriers in the supply chain in India are lack of availability in local transport, ban on
availability of overseas transportation, etc. also hampered the domestic demand.

2. Impact of COVID-19 on domestic demand

With the onset of COVID and with governments across the world mandating lockdowns to
curb the virus spread, the first and foremost shock was felt by the Labour and Capital
markets. Lack of labour meant factories and manufacturing units shutting down while the
fears of recession and availability of liquidity meant people were hoarding up on cash
instead of investing it, causing a huge hit to the financial markets. This lack of willingness to
spend on goods other than bare necessities meant that sectors like Tourism, aviation and
hospitality suffered the most, as they were considered as luxury items by the Indian
consumer. Automakers have fared no better as the lack of demand for vehicles have hit
them too. In all these industries, the ripples can be felt further up the supply chain as
 individual ancillaries that thrive on the success of these industries have been forced to shut
down due to a lack of revenue to continue operations. Due to the postponing of purchasing
decision by the consumers, retail and entertainment industries were also adversely affected.
Constant loss in jobs, fall in income etc. have played with the mental well-being of the
average Indian who has now become very conservative in his fiscal habits. If we were to
look at the global level, India exports around 7500 commodities to around 140 countries
and most of their exports were to China, the birthplace of COVID. With COVID affecting the
spending habits of the Chinese consumer, demand for items like seafood, jewellery,
petroleum etc. from India has taken a huge hit. All of this has resulted in a complex vicious
cycle where companies’ production suffers due to lack of demand, resulting in their
shutdown or layoffs which in turn further contracted consumer spending.
Demand classically depends on:
(1) Consumer Income
(2) Consumer Tastes
(3) Consumer Preferences
(4) Availability of Substitute goods and
(5) Number of Consumers
What COVID did was have a major impact on factors (1) to (4). Reduction in consumer
income meant consumer tastes changed for the worse. They started preferring cheaper
substitutes wherever possible and gave up on luxury items itself. This meant that industries
manufacturing high end goods or products or providing services that catered to human
leisure took the biggest hit. In addition, several barriers to supply chain like slow movement
of goods, bottleneck in last mile delivery, slow credit flow from banks, lack of cash flow etc.
didn’t help matters either.

3. Based on 1 and 2 above, show the ultimate impact on domestic price and output levels,
using demand and supply graphs (shifts in each)