NAME: KIERISEIYE EMMANUEL

MATRIC NO:17/SMS01/019

COURSE CODE: ECO 402

COURSE TITLE: APPLIED MICR ECONOMICS 2

IMPACT OF COVID-19 ON DEMAND AND SUPPLY IN THE NIGERIAN ECONOMY

In Nigeria, efforts were already being made to bolster aggregate demand through
increased government spending and tax cuts for businesses. The public budget
increased from 8.83 trillion naira ($24.53 billion) in 2019 to 10.59 trillion naira
($29.42 billion) in 2020, representing 11 percent of the national GDP, while small
businesses have been exempted from company income tax, and the tax rate for
medium-sized businesses has been revised downwards from 30 to 20 percent.
Unfortunately, the COVID-19 crisis is causing all components of aggregate demand,
except for government purchases, to fall (Figure 1).
The fall in household consumptionin Nigeria will stem from 1) partial (or full)
restrictions on movement, thus causing consumers to spend primarily on essential
goods and services; 2) low expectations of future income, particularly by workers in
the gig economy that are engaged on a short-term/contract basis, as well as the
working poor in the informal economy; and 3) the erosion of wealth and expected
wealth as a result of the decline in assets such as stocks and home equity. The federal
government has imposed a lockdown in Lagos and Ogun states as well as Abuja
(which have the highest number of coronavirus cases combined). Subnational
governments have quickly followed suit by imposing lockdowns in their states.
Nigeria has a burgeoning gig economy as well as a large informal sector, which
contributes 65 percent of its economic output. Movement restrictions have not only
reduced the consumption of nonessential commodities in general, but have affected
the income-generating capacity of these groups, thus reducing their consumption
expenditure.
Investments by firms will be impeded largely due to the uncertainties that come
with the pandemic-limited knowledge about the duration of the outbreak, the
effectiveness of policy measures, and the reaction of economic agents to these
measures—as well as negative investor sentiments, which are causing turbulence in
capital markets around the world. Indeed, the crisis has led to a massive decline in
stock prices, as the Nigerian Stock Exchange records its worst performance since the
2008 financial crisis, which has eroded the wealth of investors. Taking into
consideration the uncertainty that is associated with the pandemic and the negative
profit outlook on possible investment projects, firms are likely to hold off on long-
term investment decisions.
On the other hand, government purchases will increase as governments, which
typically can afford to run budget deficits, utilize fiscal stimulus measures to
counteract the fall in consumer spending. However, for governments that are
commodity dependent, the fall in the global demand for commodities stemming
from the pandemic will significantly increase their fiscal deficits. In Nigeria’s case,
the price of Brent crude was just over $26 a barrel on April 2, whereas Nigeria’s
budget assumes a price of $57 per barrel and would still have run on a 2.18 trillion
naira ($6.05 billion) deficit. Similarly, with oil accounting for 90 percent of Nigeria’s
exports, the decline in the demand for oil and oil prices will adversely affect the
volume and value of net exports. Indeed, the steep decline in oil prices associated with
the pandemic has necessitated that the Nigerian government cut planned expenditure.
In fact, on March 18, the minister of finance announced a 1.5 trillion naira ($4.17
billion) cut in nonessential capital spending.
The restrictions on movement of people and border closures foreshadow a decline in
exports. Already, countries around the world have closed their borders to nonessential
traffic, and global supply chains for exports have been disrupted. Although the exports
of countries that devalue their currency due to the fall in the price of commodities
(like Nigeria), will become more affordable, the limited markets for nonessential
goods and services nullifies the envisaged positive effect on net exports.

CHANGE IN THE PRICE OF GOODS BEFORE AND AFTER COVID-19

These include tighter access to credit and the complexities of loan repayments for the farmers,
and limited access to farm inputs.

Other factors I identified included how the shutdown of markets and slow transportation
networks in Nigeria have resulted in wastage and inadequate food supply. Likewise, the border
closure limited food imports, further shrinking the supply chain.

Adding to this complex situation were the lockdown directives. The extension for another two
weeks in the key cities resulted in people panic buying to ensure they had supplies of food. This
inadvertently led to a rise in the price of food items due to the mismatch of demand and supply.

The consumer price index for food has increased all through the pandemic period. It rose from
14.9% in February 2020 to 15.18% in June 2020, showing an increase of about 0.28% within
only four months. It is forecast to increase to 17% by September 2020. This is a considerable rise
from 13.39% in July 2019 and 14.09% in October 2019.

The peculiar situation for Nigeria was that the food price increases varied across the
country. Some states felt the hit of food price inflation harshest. In Sokoto (northwest Nigeria)
prices went up year on year by 17.12%, in Plateau (north central) by 16.99%, Gombe (northeast)
16.96%, Edo (south-south) 16.71%, and Kano (northwest) 16.45%. The states with the lowest
food price rise were Bayelsa (south-south) 11.89%, Katsina (northwest) and Bauchi (northeast)
13%, Nasarawa (north central) 13.5, and Ondo state (southwest region) with 13.53%.

Some of these states are located in major food-producing areas of the country. Sokoto is a major
producer of beans, cowpea, groundnut, garlic, wheat, sugarcane, pepper, onions and tomatoes.
Groundnut, sorghum, sesame seed, maize, potatoes, tomatoes, onions and pepper are produced
extensively in Plateau state. Likewise, Gombe is well known for groundnut, ginger, cowpea,
sesame seed, tomatoes and pepper. Plantain, oil palm and cassava is largely produced in Edo
State. Also, Kano has extensive production of rice, garlic, sorghum, cowpea, wheat, pepper,
onions and tomatoes.

PRICES OF FOOD BEFORE AND AFTER COVID-19

Currently, Nigerians are witnessing an increase in the price of food. The prices of foodstuffs like
meat, eggs, and beans are rapidly increasing as the pandemic and flooding have worsened the
poor agricultural and farming conditions across the country.
In total, the price of food in Nigeria for families have grown astronomically high, and market
experts have warned that these high prices of food are here to stay as farming has become
untenable due to flooding and insecurity.

Prices of foodstuff such as rice and bread have reached decade-high cost as consumer demand
increases; other foodstuffs like fish, chicken and milk remain volatile because of difficulty in
transportation and processing of these products.

In short, supermarket customers and restaurant owners shouldn’t expect prices to drop anytime
soon.

FOOD PRICES BEFORE AND AFTER COVID-19

Prices of food 2020 2021

White Beans 32000 36000
Groundnut 27000 32000
Maize 9000 10000
Palm Oil 9000 11000
Rice 17000 29000
Tomatoes 8750 9500
Onions 21000 25000
Yam 1000 900
Indomie 2100 2200
Sweet Potato 650 650
Spaghetti 250 250

PRICE ELASTICITY OF DEMAND AND SUPPLY OF FOOD

Both the demand and supply curve show the relationship between price and the number of units
demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity
demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of
demand is the percentage change in the quantity demanded of a good or service divided by the
percentage change in the price. The price elasticity of supply is the percentage change in
quantity supplied divided by the percentage change in price.

We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary.
An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating
a high responsiveness to changes in price. Elasticities that are less than one indicate low
responsiveness to price changes and correspond to inelastic demand or inelastic
supply. Unitary elasticities indicate proportional responsiveness of either demand or supply.

To calculate elasticity along a demand or supply curve economists use the average
percent change in both quantity and price. This is called the Midpoint Method for
Elasticity, and is represented in the following equations:

Calculating percentage change in price of the products above

For White Beans

P1= 32000
P2= 36000

Elasticity of price will be

36000-3200/(36000+32000)/2 ×100
=4000/34000 × 100
= 11.7
>1 Elastic

For Groundnut
P1= 27000
P2= 32000

Elasticity of price
32000-27000/(32000+27000)/2 × 100
= 16.9
> 1 Elastic

For Maize
P1= 9000
P2= 10000

Elasticity of price
10000-9000/(10000+9000)/2 × 100
=0.01
<1 Inelastic

For Palm Oil

P1= 9000
P2= 11000

Elasticity of price
11000-9000/(11000+9000)/2 ×100
=10
>1 Elastic

For Rice
P1= 17000
P2=29000

Elasticity of price
29000-17000/(29000+17000)/2 ×100
= 52.1
>1 Elastic
For Tomatoes
P1= 8750
P2= 9500

Elasticity of price
9500-8750/(9500+8750)/2 ×100
= 8.2
>1 Elastic

For Onions
P1= 21000
P2= 25000

Elasticity of price
25000-21000/(25000+21000)/2 ×100
=17.3
>1 Elastic

For Yam
P1=1000
P2=900

Elasticity of price
900-1000/(900+100)/2 ×100
=10.5
>1 Elastic

For Indomie
P1=2100
P2=2200

Elasticity of price
2200-210]/(2200+2100)/2 ×100
= 4.6
>1 Elastic