Andrew Ghafary 202003834

Problem 4:
First of all, Covid-19 has been a huge threat to most of the world’s leading economies, and a lot of
countries are starting to examine the economic damages that this virus made and how to try to limit it .
While there is no denial in the fact that the leading scenario right now is a global recession, we will
examine now in this essay how demand will be affected by this pandemic and its impact on the global
economy.
The fast spread of this virus led to complete lockdown in most countries leading to numerous
consequences. First, factories have stopped working in infected countries which has led to numerous
shortages in various merchandises including necessary goods, like the “ toilet paper “ crisis in the US and
Australia. Second, this pandemic increased the risk factor which caused huge changes in people’s
demand functions; a lot of people started “bulk-buying” as we say on social media leading to more
shortages in the supermarket. While the demand for necessary good increased because of the “survival
instinct”, the demand for luxury good decreased dramatically, leading to huge price inflation in food
products and other essential goods, with little supply due to closures. Another important notice is that
factories fired a lot of employees to limit their losses, especially in struggling economies, leading to a
huge number of unemployed people at home, surviving on government aids. In the US alone, which is
arguably the world’s leading economy, more than 20 million people applied for unemployment with
over a third of the American population not paying rent for the month of April. While as we said people
rushed at first to buy food, we can quickly notify how the demand actually slowed down because of the
economic crisis spreading around as fast as the virus. Especially in Lebanon, where the dollar crisis adds
up to all of this, we can see the emergence of not so known brands in the supermarket replacing old
ones, decreasing customer loyalty in favor of saving a bit more which is a typical economical behavior in
“crisis mode”. In other words, if Andrew used to buy 2kgs of meat/week to feed his family, after the
pandemic, Andrew will decide to put less meat in the meals and buy probably 1kg/week due to an
increase in the price of meat, due to a decrease in supply, low budget and income due to factories
closure and unemployment, and will opt to save the rest for another week. As we learned in this class,
choice is dependent of two primary variables, utility and income. While it is clear in the course of this
essay that income generally decreased for almost all people, the Budget constraint line shifted to the
left, leading to decreased utility and smaller x1* and x2* as we concluded as well, in addition to that,
preferences changed during this quarantine, with most people focusing on barely living, not living
“lavishly”, luxury goods are not in high demand right now which is explainable. For instance, if Andrew
used to buy designer clothes in regular days, Andrew will decide to save that money right now to help
families and friends in need, and will stop purchasing expensive clothes, not due to the fact that these
shops closed, because most of them transitioned to online platforms, but due to the economic crisis.
Furthermore, a lot of people went out of business, especially in Lebanon, which leads to basically
tightening the middle class, and widening the lower class with greater inequalities emerging between
the rich and the poor. People that work on daily basis to supply food for their families are now between
two choices, risking their lives and starving to death, with prices increasing and wages not adjusting
accordingly. With most airports on lockdown, tourism stopped, so the whole aggregate demand is also
lower with fewer people entering the country. Moreover since a “Nutella” jar and a “Spar Squillos” jar
almost give the same utility and same sensation, people will opt for the one with the lower price as
discussed in class, and since income decreased, budget decreased as well, so choices are now tighter
that before which we also covered in class.
To conclude, the effect of corona on the world economy is inevitable, leading to a huge decrease in
demand due to numerous factors, a decrease in income, bankruptcy of many companies, an inflation
due to short supply, shortages and many more. While different products of the same kind almost give
same utility we can see people choosing the cheaper one, to increase savings which rises in conditions
like this, and people are more focusing on surviving, buying more essential goods and disregarding
luxury good which is also expected in crises like this.