Question

Please write 2-3 paragraph, Thank you.

4. Suppose demand for hand sanitizer because of a flu outbreak has doubled. Should the company build another factory? What are the underlying demand and supply movements and shifts implicit in this question.

Answer 1

Since there is a flu outbreak, the demand for hand sanitizers has doubled. To match up with the consumer demand, the company has to increase its supply otherwise there will always be excess demand in the economy. (Of course a possible alternative for company is to continue with current level of supply and sell its products at a higher price such that only the population which pays highest price would get hand sanitizers). But assuming company to be sensitive to the situation, it should build another factory to cope up with consumer demand.

Demand curve should shift rightwards since demand of good has doubled in the market. If supply curve shifts outwards too to match the demand, equilibrium quantity increases but equilibrium price is ambiguous. It may increase or decrease depending on the magnitude of supply shift. One particular case is when increase in supply < increase in demand.

INCREASE DEMAND and INCREASE SUPPLY Price Supply New Supply P2 New Demand P1 Demand Q1 Q2 Quantity