ECON1025: In the beginning of the recent Coronavirus Disease 2019 (COVID-19), prices of surgical masks spiked by at least 500%, with a box of 50 surgical masks: Price and markets Report, RMIT, Singapore

Introduction:

In the beginning of the recent Coronavirus Disease 2019 (COVID-19), prices of surgical masks spiked by at least 500%, with a box of 50 surgical masks being sold at about five dollars pre-COVID-19 which soon raised to around $30 during (Chiang, 2020). The drastic increase in price of surgical masks is caused by the sudden increase in demand of surgical masks in Singapore as the Singapore government made the wearing of masks mandatory for all individuals who are outside of home. This report uses Prices and Markets concepts to address the following questions: Why did the prices of surgical masks spike in Singapore? How did COVID-19 affect elasticity of surgical masks? What did the government do to regulate price of surgical masks as well as what else can be done?

Why did the prices of surgical masks spike in Singapore?

Demand of surgical masks increased drastically in Singapore in the beginning of COVID-19. The percentage of people wearing masks increased from 25% in February to about 75% in April (Statista, 2020). This increase in demand of masks caused demand curve to shift rightwards from D0 to D1, as shown in figure 1. Increase in demand results in an increase in quantity demanded from Q0 to Q1 at the original price point, P0. Q0 is the quantity supplied while Q1 is the quantity demanded. Since quantity demanded exceeds quantity supplied, Q1>Q0, shortage of surgical masks occurs. Surgical masks became scarce in the market and in a free market economy driven by self-interest, firms will try to maximise their benefits by increasing the prices of surgical masks to highest level possible. Hence, price of surgical masks spiked from P0 to P1.

How did COVID-19 affect elasticity of surgical masks?

(PED)

Pre-COVID-19, surgical masks were goods of elastic own-price elasticity (PED), PED>1, as it is only needed by a specific group of people for instance, doctors, nurses and the ill. As shown in figure 2, an increase in price of surgical masks from P0 to P1 would lead to a more proportionate increase in quantity demanded by consumers from Q0 to Q1. However, during the COVID-19 situation, surgical masks became a necessity in every household as it was made mandatory by the Singapore government for every individual who’s leaving the house to wear a mask. Hence, PED of surgical masks have become inelastic, 0<PED<1, whereby an increase in price from P0 to P1 will cause less than proportionate increase in the quantity demanded by consumers, Q increases slightly from Q0 to Q1 , as shown in figure 3. In addition to that, there is almost no substitutes for surgical masks in the current market, hence, consumers are willing to purchase surgical masks at a much higher price. According to Today, consumers were willing to spend $100 on a box of 50 surgical masks (Ong, 2020).

(PES)

Own-price elasticity of supply(PES) of surgical masks during the start of COVID-19 situation is price inelastic, PES<1, as the supply of surgical masks available is limited and businesses are unlikely to be able to increase quantity supplied in a short period of time as time is needed for masks to be produced by factories. Hence, increase in price of surgical masks from P0 to P1 would result in a less than proportionate increase in quantity supplied from Q0 to Q1, as shown in figure 4. According to the Straits Times, Singapore government soon started to boost production of surgical masks by searching for new imports of surgical masks and stockpiling reusable cloth masks (Yang,2020). This increase in raw materials and labour causes PES to be

more elastic than before, from Si to Se, as shown in figure 4.

What did the government do to regulate price of surgical masks as well as what else can be done?

According to a CNA report that the Singapore government has started exercising its authority under the Price Control Act to inspect e-commerce businesses and has sent out numerous letters of demand to request for an explanation of their profit margins and cost price. It was reported that a fine up to $10,000 would be given to companies who fail to do so (CNA, 2020). However, surgical masks have yet to be recognised under a price-controlled item. The government cannot list surgical mask as a price-controlled item as setting a price ceiling for it would result in a remain of shortage and higher welfare lost (shaded area) as shown in figure 5.

The Singapore government can provide a subsidy incidence on businesses. As shown in figure 6, government subsidy increases supply of surgical masks from S0 to S1. Even though subsidy is paid to the suppliers, however, it is enjoyed by both supplier and consumer as supplier receive prices at Ps while consumers pay a price of Pc for each unit of surgical mask consumed. The price difference between Ps and Pc is the subsidised by the Singapore government. This would ensure that consumers consumer at an affordable price and at the same time, suppliers receive a reasonable pay

In conclusion, the COVID-19 situation has spiked the demand of surgical masks, making it a necessity, resulting in a shortage. Suppliers who want to increase their

private benefits would increase the price of surgical masks drastically to increase sales revenue. Government can intervene by providing subsidies to suppliers, which will benefit both suppliers and consumers. However, some limitation of subsidies includes the fact that government has to contribute a huge amount of funds to subsidize the cost of surgical masks, hence, might end up increasing the amount of tax revenue. In addition to that, the government may have insufficient information to determine how much to subsidize.