Economic Systems With Constrained Supply Potential Tilt Towards Importation for Alleviating Demand Shock

Abstract

In many economic systems where demand is low but steady, supply formation generally takes time and in the form of led by demand, i.e., supply catches up with demand, but seldom overproduce to cater to sudden surge in demand due to constraints in raw material or limited machinery time. These systems exist in many spheres in our economic life, but largely remain hidden from view and are thus poorly understood from the micro perspective. One example is the supply of food packaging containers for particular types of food. Although substitute containers of different volume and geometry are available during a demand shock such as the promotion of food takeaways in the COVID-19 pandemic, certain food are better packaged for consumption in specific containers tailored for the purpose. Two options exist to alleviate the stress of a demand shock: (i) increasing supply and (ii) importation. The first option is through increasing production at local manufacturer. This may sound trivial but, in the case of a class of food container of low production volume, significant difficulty may exist in ramping up production. Such a scenario may come about due to constraints on raw material supply, or more typically, a lack of machinery time as companies usually have limited machinery time for manufacturing a niche product. The latter point is important as it can be classified as a retrenchment of priority typified by the attachment of even lower priority to a niche product in times of general demand surge for all products. For example, increase in takeaways would generally place more demand stress on all types of food containers. In this case, manufacturers would place more priority on over-producing high demand items and reduce time and manpower allocation for niche products. Combination of the above would mean that genuine difficulty exists in over-producing a niche item in times of a general demand shock. This leaves the second option: importation, as the most likely path forward for a city or metropolis. In some cases, importation of similar niche products from manufacturer with lower cost structure may be economically more efficient than production within the economy. But, price hike during a demand shock would generally ameliorate any economic efficiency gained through importation. Collectively, economic systems exist where supply potential is constrained to the point where little manpower and machinery time could be allocated for over-producing a niche item during demand shock. In such cases, the natural economic choice would be importation of similar product where in most cases, an economic penalty is inevitable given price hike during demand shock.

Keywords: demand shock, supply constraints, machinery time, niche product