MICROECONOMICS ASSIGNMENT - GROUP 15

TOPIC: DEMAND AND SUPPLY

FOCUS/AIM: MEDICAL MASKS DEMAND AND SUPPLY IN INDIA

GROUP MEMBERS:
 MAHAK RASWANT - MS21D003

 GOWTHAMAN - MS21A019

 S SHARATH RAM - MS21A053

 SANGANATHAN T - MS21A057

 VARUN KUMAR - MS21A070

Before the period of COVID - 19, the Indian mask industry was well equipped with
considerable production capacity to meet the local needs of the consumers. The Indian mask
industry faced occasional sudden demand in N95 masks even before the emergence of COVID
19 because of poor air quality in Delhi mostly during OCT 2019 and this sudden increase in
demand did not cause a considerable increase in price of N95 mask in India. This was because
the mask industry in India was equipped with an excess of 20% capacity to adjust to the
consumer demand. Because of this both the supply and demand curve for the masks were
able to attain an equilibrium price P1. The equilibrium price of the
 Surgical mask was - INR 1 and that of N95 mask was INR 17.75(P1) with
 Average demand of 0.6 million masks sold per month(Q1).

FIG. 1

Immediately before the COVID - 19 Outbreak:

There was a sudden increase in the Price of Surgical and N95 masks during JAN 2020, even
before the breakout of COVID-19 in India. This was because, China was, already experiencing
COVID-19 breakout and faced a sudden 10X increase in demand to around 2 million units per
month for the masks and the prices shot up from INR 1 to INR 5 for surgical mask and N95
masks prices increased from INR 17.7 to INR 120 in the Chinese market. This prompted the
Indian suppliers to export the masks to China which resulted in a local shortage of masks in
India, causing the prices to move higher. By the 2nd week of FEB 2020, the prices of the masks
were similar in both China and India.
From the Demand and Supply graph, we can infer that the demand curve shifts rightwards
and supply curve remains the same.
 FIG. 2

Sometime after the COVID-19 Outbreak:

During the period of mid-March 2020 till May 2020, the Indian Market experienced a sudden
increase in mask demand because of the COVID-19 outbreak in India. The local demand
jumped more than 19X times the usual demand. The demand rose to 38 million Masks per
month. Since most of the other countries were also experiencing COVID-19 outbreak in their
location, India could not import the mask from other nations, causing the local price of the
mask to shoot up even higher, from INR 5 to INR 18 for surgical masks, and INR 120 to INR
600 for the N95 mask. Not only mask producers/ local manufacturers had capacity
constraints, the supply from them also decreased because there was a shortage in raw
material for masks. The Indian manufacturers imported most of the raw material from China
which made the supply of masks even worse. Far worse was the domestic suppliers, exporting
to other countries as export customers were offering higher prices for masks, leading to
government intervention and introducing export ban.

FIG. 3
Supply and Demand - June’20:

Post the huge surge in the demand, more than 100 companies in India started a conversion
process whereby they switched their production from the original products to face masks.
The main reconversion sectors were the fashion, the socks and the personal hygiene industry.
When the pandemic struck, a sudden spike in demand for protective masks had created a
panic situation. Between April and June, new players entered, and companies ramped up
production pinning hopes on rising domestic and global demand.

FIG. 4

As shown in Figure 4, the horizontal axis represents the supplier’s quantity supplied for masks,
the vertical axis indicates the price at which the consumer is willing to, and able to purchase
the mask. The demand and price of the mask are negatively related. As mentioned earlier,
the demand for masks in India in the Month of Feb-2020; Demand(D2) was 2 Million Units
which increased to Demand(D3), that is, 38 million units. However, the ramped up supply
capacity, Supply(S1) of 9.1 million units, in the month of Mar-20, was further increased to
Supply(S2), that is, 25-30 million units because of new entrants and increased production.
Thus, the equilibrium point shifted from P3 to P4.
Supply Surplus - End of Year 2020:

“Established players were able to use their full capacity for a brief time, but once exports were
banned, demand started dropping drastically, and supply kept getting created just as fast,
resulting in extreme oversupply”, All India Mask Manufacturers Association president
Anshumali Jain stated. The government had banned all types of exports of masks in March’20
to avoid a shortage in the country, at a time when covid infections had started rising.

FIG. 5

As shown in Figure 5, the horizontal axis represents the supplier’s quantity supplied for masks,
the vertical axis indicates the price at which the consumers are willing to, and able to purchase
the mask, the demand for masks in India in the Month of Oct-20; Demand(D3) was 38 Million
Units which had very little to nil drop. However, the suppliers increased capacity from
Supply(S2) of 38 million units to Supply(S3), that is, increased the installed capacity to
produce N95 masks over 200 million pieces per month, with the utilisation being a meagre
10+%. For 3-ply (surgical) masks, capacity is over 600 million units per month, while only 30%
is utilised.
Government Intervention on Mask Price:
In September 2019, N95 mask, bought by government agencies at Rs 12.25 including taxes,
raised to Rs 17.33 in January’20, Rs 43 by March’20-end, and up to Rs. 63 by mid-May’20, an
increase over 250% since the beginning of 2020. During March’ 2020 the government
expected 38 million masks for India. Also globally, including India, 80 countries banned export
of masks. This increased shortage of masks in India as import of masks got hampered. Due to
shortage of N95 masks, the price went up to Rs. 150-300. In March’20, the Government
notified an order under the Essential Commodities Act, 1955 to declare N95 masks as
essential commodities till June 30, 2020. It has also issued an advisory under the Legal
Metrology Act, so that States can ensure these items are not sold for more than the
Maximum Retail Price (MRP) also known and ceiling price. After government intervention,
prices of N-95 masks dropped by up to 47%. So, the government intervention achieved its
intended goal, and the necessity of price controls is evident during this sudden and turbulent
event that caused the temporary confusion in the price-finding mechanism of the free market
system. But is there any unintended consequence of public masks?

From a panic situation of an extreme shortage in April’20, India started to see an oversupply
of masks due to more manufacturers entering this industry. Established players were able to
use their full capacity for a brief time, but once exports were banned, demand started
dropping drastically, and supply kept getting created just as fast, resulting in extreme over
supply. Also, for instance the government asking people to wear gamcha as a mask this trigger
falling demand for masks in socio-economic classes. Also, low priced duty-free Chinese
imports fuels this further. The government opened up restrictions on exports of N95 masks
in October’20, a bit too late. Meanwhile, the Indian market had a glut of overcapacity, falling
prices, and low-quality standards. Exports for 3-ply masks were allowed from August’20, but
India had already missed the bus to become an export hub, and lost orders and long-term
contracts from Western countries. Also, with rising raw material prices and falling margins,
the industry could not become globally competitive. The demand for the mask nearly has no
value after November’20. Extraordinary times call for extraordinary measures. The outbreak
of Covid-19 and the subsequent shortage of face masks called for government intervention in
India using ceiling price, & ban on export. The government intervention lowered the price of
masks quickly, ensuring public health and suppressing the spread of Covid-19. But it also had
its pitfalls. The counterfactuals demonstrate that the government intervention lasted a bit
too long, distorting the balance of supply and demand of masks. The government
intervention should end as soon as the price-finding mechanism regains its function.
Conclusion:
At the beginning of the year 2020, nobody imagined, Indian mask industry would see such
drastic changes in the demand and supply of face masks, especially N95 and surgical masks.
In the beginning of March'20, when COVID-19 started hitting the country, there was a sudden
increase in the demand for face masks, because of which the price of a surgical mask rose
from Rs. 5-10 per mask to Rs. 50-100 per mask, a whopping rise of ten folds. Even after such
an increase in prices, masks remained out of stock at nearly all the places.

Looking at this, we can say that the response of supply of masks is low with respect to its price
factors. But in the long-term supply is more sensitive to the increase/decrease of prices. Due
to which, new industries and manufacturers started producing masks, seeing it as an
opportunity for growth and to cope up with the increasing demand. After which, the price of
masks started seeing downfall to balance out the increasing supply.

The government regulations like ban on mask exports and improving pandemic situations
suddenly dropped the demand of the mask within the country, but the supply saw no stop.
This led to a situation where the capacity of the mask production capacity had reached to 200
million but actual production was about ~30 million (~15%). Tables turned upside down for
mask manufacturers from supply shortage to oversupply, after which half of the
manufacturers have closed their shops or are planning to do so, as they are left with high
inventory balance and under-utilised machinery. With the mask-market reaching the
saturation stage, re-entering will again increase the supply, and decrease the price. But,
considering the countries, where the potential of the mask market is still considerable,
current consumption of masks is sufficient for the support and growth of the mask
manufacturers.

References Used:
 https://www.indiatoday.in/india/story/india-needs-at-least-38-million-masks-to-fight-coronavirus-
has-only-25-of-the-amount-report-1661030-2020-03-29
 https://timesofindia.indiatimes.com/business/india-business/mask-oversupply-may-see-50-cos-
shut-shop/articleshow/79712120.cms
 https://www.hindustantimes.com/india-news/from-shortage-last-year-india-now-has-surplus-of-
ppe-kits-n95-masks-101620620597446.html
 https://intheknow.insead.edu/blog/microeconomics-hummingbird-economics-during-covid-19
 https://www.youtube.com/watch?v=T3Zw6WKzsBY