Table of Contents

1.0 Introduction of COVID-19 situation................................................................................................16

2.0 Contents..............................................................................................................................................17
2.1 Invisible hand theory.....................................................................................................................17
2.2 The effects of invisible hand theory on the face masks...............................................................17
2.3 The demand and supply for face mask........................................................................................17
2.4 Response from consumers and price elasticity of demand.........................................................18
2.5 Respond from seller and price elasticity of supply......................................................................19
2.6 Effect of Price Ceiling on face masks...........................................................................................20
2.7 Solution of shortage.......................................................................................................................22
3.0 Conclusion..........................................................................................................................................23
Reference..................................................................................................................................................24

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1.0 Introduction of COVID-19 situation
COVID-19 outbreak causes a global economic downturn, tumbling stock markets, and factory
closures. It began in Wuhan, China and this virus has intense infectivity. To avoid transmission
of COVID-19, WHO recommends everyone to wear a face mask in public places. It is well
known that China is the world's largest exporter of face masks, accounting for approximately
40% of the world's total. However, the spreading of COVID-19 in China forces China
government to implement a policy to lock down the affected cities. The closure of factories leads
to a shortage of face masks in the market. As consequence, the limited resources cause demand
surplus supply which forces the sellers to increase the price to reach the equilibrium. The price of
face mask fluctuates these recent months. Before the crisis of COVID-19, the price of a face
mask is around RM0.20 each. As the usage of face mask doubled during the COVID-19
pandemic, the price of the masks has soared to around RM2.40 each. In this paper, we will
discuss how individual behavior influences the face mask market. (Sohrabi, 2020)

2.0 Contents
2.1 Invisible hand theory
In 1776, Adam Smith came up with the invisible hand theory. The invisible hand is an
unobservable force that promotes market freedom. He believes that the market operates freely
without government restrictions and regulations, and that buyers and sellers would make the
market work better for their own benefit. Therefore, market price fluctuations are determined by
demand and supply. When demand and supply reach an equilibrium point, that's the price of the
market. (Rothschild, 1994)

2.2 The effects of invisible hand theory on the face masks

During this COVID-19 pandemic, demand for face masks is doubled, this will cause a shortage
in the face masks market. At this time, the face masks supplier will take the opportunities to raise
their price to make more profit. Therefore, people will reduce the demand for face masks due to
the price of face mask goes up and after that suppliers will lower their prices to sell them out. At
this point, the market is like have an "invisible hand", pushing the market supply and demand
towards equilibrium.

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2.3 The demand and supply for face mask

Price of face mask

D1 S0

D0

P1 E1

P0 E0

Quantity of face mask

Q0 Q1
Figure 1

Figure 1 shows how the face mask’s demand curve moves during the COVID-19 pandemic.
Before the COVID-19 pandemic outbreak, we can see the intersection of the demand curve (D0)
and supply curve (S0) at point E0 which is the market’s equilibrium point (E0) and it determined
the price at P0 and the quantity at Q0. When the COVID-19 pandemic spread globally, people
will increase the demand for face masks to avoid infect pandemic and it is causing the demand
curve to shift to the right from D0 to D1. A huge increase in demand leads the face masks market
shortage, so this condition forces face mask suppliers to increase the price of face masks. We
know the Law of supply that is when the price goes up, producers are willing to increase the
production to make more profit (Gale, 1955). From figure 1, the price rises from P0 to P1, and
quantity surge from Q0 toQ1 because the law of supply and a new equilibrium point (E1) will
appear. Meanwhile, E1 also determines a new price and quantity in the face mask market.

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2.4 Response from consumers and price elasticity of demand

Price of face mask

The effect in price is bigger

D0 than the quantity demand

P1

P0

Quantity of face mask

Q0 Q1
Figure 2

In the context of the COVID-19 pandemic, face masks are only the best tool for avoiding a
pandemic. Therefore, regardless of the price of face masks, people will buy them to avoid
infection. According to the price elastic demand theory (PED), we can know that Figure 2 is an
inelastic graph because the change of price is greater than the change of quantity, which means
that the quantity will not change much when the price rises or falls. The nature of this change in
demand is that face masks are a necessity good because it makes consumers feel they can't live
without them, even if they are very expensive.

The first determined the face masks become inelastic is there is no substitute. If the face mask
has substitutes, consumers will reduce or give up their demand for face masks and buy other
products instead due to the price rises. So during the COVID-19 pandemic, there is no substitute
for the face mask. As a result, even as the price of face mask rises, consumers still need face
masks to prevent infection from the pandemic. (Feng, 2020)

Another determined face mask is the type of goods. Normal good can be divided into two kinds
of goods which is necessity good and luxury good. The difference between the two is that the
former does not affect the change of demand due to the change of income, while the latter's
demand depends on the change of income. So from the situation of the COVID-19 pandemic,

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face mask is a necessity good because consumer didn’t reduce their demand for the mask when
the price rises.

2.5 Respond from seller and price elasticity of supply

Price of face mask (P)

S0 The effect in price is bigger
than the quantity supply

P1

P0

Q0 Quantity of face mask(Q)

Q1
Figure 3

The COVID-19 outbreak has also had a major impact on many suppliers. In the meantime, many
suppliers will increase their production of face masks to make extra profits. Price Elasticity
supply (PES) is a change in the quantity that a supplier is willing or able to produce when a
particular product price changes. From figure 3, when the price rises from P0 to P1, the quantity
supply didn’t change much from Q0 to Q1. This situation can be interpreted as inelastic in the
face mask market.

Firstly, when the price of face mask goes up, the price of its complement which is the raw
material also rises because the raw material suppliers also want to make extra profits so they
raise the price of raw material. However, this will lead to face mask supplier unable to increase
their production, because the raw material is more expensive. As a result, the production of face
masks is restricted. So the elasticity of supply of factors of production is large, the elasticity of
supply also large, and vice versa.

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Secondly, due to the government's implementation of the Movement Control Order (MCO)
policy, firms lack the labor force, machinery to increase their production immediately. Hence,
the supply of face masks cannot be substantially increased. In the short run, firms can only be
adjusted through inventory, so the supply of the face masks market will be inelastic.

2.6 Effect of Price Ceiling on face masks

Figure 4

Figure 4 is a price celling graph in face mask market. Price celling is the price that less than or
more than the equilibrium price, and it will be impose by government to control the maximum
price that earned by supplier. The situation 1, when the price (P1) is higher than the equilibrium
price, the prices are not restricted, so the price P1 will naturally move to the equilibrium price.
The situation 2 is there will be a shortage in the market which is the price lower than the
equilibrium price. The firms will be reluctant to produce that much because prices are lower.
Because of the shortage of goods, the government rationed and even will created a black market
to buy and sell the scarce goods.

Form figure 4, that is the shortage in the face mask market, and the shaded area is called black
market. The black market is an activity that is not traded through the market or through legal
channels. When there is a shortage of an item on the market due to a fixed government price, the
black market will trade at a price higher than the market price (Michaely, 1954). Before the
COVID-19 outbreak, the price of a face mask is at PE. When COVID-19 happened, the price of

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face masks has been rising gradually, so the government has imposed price ceiling to prevent
them from rising continuously.

After the government sets a price ceiling, the price will fall to 1.5, which will lead to a market
shortage. However, this will lead to the emergence of a black market in which sellers can obtain
more profits, but this increases the burden on people and the government also cannot increase
revenue because of the underground economy. Therefore, the government will impose price
ceiling to protect the welfare of consumers. Meanwhile, the government will also impose fines
on sellers whose prices exceed the price ceiling.

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2.7 Solution of shortage
Due to the China government impose a policy to lock down the country, this will lead to a severe
shortage of face masks in the market. As a result, to solve the problem of shortage of face masks,
the government can impose limits on the number of masks people can buy. This will prevent
people from rushing to buy face masks and make them available to more people. Besides, it will
reduce the black market, as people cannot hoard a lot of face masks and resell at a higher price.
This solution will not only be able to distribute face masks equally to the people and also can
temporarily solve the shortage of face masks on the people.

The shortage of face masks has caused the face mask production line to be unable to meet all the
demands of the market, so the government can temporarily let other production lines produce
masks. In addition, the government could provide subsidies to speed up the production of face
masks (Lohr, 2000). This will not only bring profits to the factory, but also solve the shortage of
face masks.

Moreover, the government can also import large quantities of face masks from overseas. This
will help local manufacturers cope with excessive demand in the market, thus reducing the
shortage of face masks.

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3.0 Conclusion
In conclusion, the COVID-19 outbreak has led to a worldwide economic downturn. People are
snapping up face masks to avoid infection. At the same time, demand for face masks is
increasing and prices are rising, leading to a severe shortage of face masks. Therefore, the
government must impose price ceiling to ensure that everyone can afford face masks. However,
this will lead to a black market, so the government will have to impose purchase quantitative
restrictions order and impose penalties on sellers who sell for more than the price set by the
government. Therefore, prevention is better than cure, what we should do is to wear a face mask
in public places and go out less to avoid the spread of the virus (Al Humaid, 2020).

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