Natural disasters and purchasing power
(picture from Wix's library)
This article relates to the following classes: shifts in demand, shits in supply, and price elasticity of demand. You can find my course at: https://www.udemy.com/principles-of-microeconomics-complete-course/
As you all guessed, I’m going to talk about some economic impacts of natural disasters on the people in the affected region.
First, a description: purchasing power measures the number of products that can be purchased by individuals. This amount broadly depends on two factors: income and prices. Higher income generally means that people can buy more things while lower prices generally means that people can buy more, ceteris paribus.
SO, how can natural disasters change people’s financial ability to purchase goods and services?
Let’s start with the input market
Remember that inputs of production are the materials, machines, infrastructures, and workers that are used to make things. Inputs are used by firms to make products sold to people.
Natural disasters are very likely to lead to a decrease in supply of inputs. Here are some examples:
(1) Disruption of local production. Factories may shut-down temporarily or permanently due to the destruction of some of their infrastructures. Natural resources can also be lost, reducing their supply.
(2) Lack of transportation within the country: Roads and other transportation means can be damaged or destroyed. Even if inputs of production can be made locally, it may not be possible to bring them to firms that need them.
(3) Reduction in imports: Natural disasters can also disrupt transportation to the country from outside. This is particularly true for smaller isolated countries. In these cases, imports of inputs of production are reduced, decreasing further their supply.
Natural disasters are also likely to lead to an increase in demand for inputs after they subside. Reconstruction efforts lead to a higher need for inputs as people, firms, and governments rebuild their assets. Note that the demand curve for inputs of production is going to be highly inelastic since reconstruction becomes a priority for those needing these products.
A decrease in supply with an increase in demand, coupled with a highly inelastic demand curve leads to a substantial increase in price for inputs of production.
Let’s continue with the output market.
Remember that outputs of production are the goods and services that consumers buy. They are what we call ‘final products’, which means that they are consumed as-such by people.
Natural disasters also lead to a decrease in supply of outputs. They also suffer from a lower local production and a lack of transportation within and from outside the country. Local producers may have to close their shops and factories or may not be able to reach consumers because of damaged roads and other infrastructures. Donations may also not be able to reach people in need because of the same issues.
In addition, higher costs for inputs of production lead to producers needing higher prices to stay profitable. This leads to a decrease in supply for those products.
Natural disasters are often accompanied with an increase in demand for outputs. This is again straightforward: products that were damaged need to be either replaced or repaired, leading to an increase in their demand. There might also be some decrease in demand because of people having left the area or having died. Depending on the case, the decrease in demand is unlikely to be as strong as the increase caused by reconstruction.
The demand curve for outputs is probably inelastic but for a different reason. Consumers in the region will probably have much less choice than before because of disruptions in supply. As you may remember, less substitutes leads to a lower elasticity of demand.
Once again, a decrease in supply with increase in demand coupled with an inelastic demand leads to a big increase in price.
Economic models thus predict that prices of both inputs and outputs tend to increase substantially when faced with natural disasters.
People suffer when natural disasters happen because of their loss of property and loved ones
People suffer after disaster because of reconstruction efforts, loss of jobs due to the closing of factories and shops, and higher prices.
As you may imagine, having less income (for those have a reduction in hours of work) while prices increase leads to a decrease in purchasing power.
The loss obviously depends on the severity of the damages incurred by the disaster.
I hope you learnt a thing or two guys!
Take care everyone.