When the demand for any commodity goes up, there are more people bidding for the same commodity, the price of that commodity goes up. Ignoring this law is like ignoring the law of gravity, you do so at your own peril. The law does not end there; it goes on to dictate that when the price of any commodity is high, the supply of that commodity increases. When this supply increases above demand, the price of that commodity decreases. It really doesn’t matter what commodity it is or what situation leads to the price increase in the first place. The law of demand and supply is yea and amen. One of the most important things this law does is to ensure that goods and services are directed to the places in the economy that need them the most, avoiding wastages or shortages. That is, to efficiently allocate limited resources.
In general, many of us understand this principle but when faced with difficult situations such as natural disasters, we abandon it, institute price controls and suffer for it. For example, after Hurricane Hugo hit Charleston, South Carolina in 1989, it polluted the city’s water supply and damaged its electric power lines, among other things. The prices of bottled water, bags of ice, and portable generators shot up. This is because there was no more drinking water from the city’s water systems and no more electricity. Prices for a bag of ice increased from $1 to $10 and petrol-powered portable generators increased from $700 to $7000. To stop this, the city’s Mayor made it illegal for anyone to raise the price of these commodities above their respective prices pre-hurricane. The penalty for disobeying was 30 days jail time and a $200 fine. This was a big mistake. A hurricane had hit, the city’s normal supply of water and electricity had been destroyed, the limited supply available then had more people bidding for it. The prices should have been allowed to go up to ensure that the limited supply of water and electricity went to the places that needed them the most.
What happened after was that those who got to the grocery stores first bought all the bottled water at the pre-hurricane prices, leaving none for those who came after. If the prices had been allowed to rise, those who got there first would have only purchased what they needed and left the rest for those who came after.
This teaches one important lesson about prices — they allow us share scarce or limited resources.
For electricity, entities that needed it the most could not get any to buy. Entities like grocery stores that need to refrigerate perishable goods (which people really needed in those dire times) could not get portable generators to purchase; banks could not get generators for their ATMs, ATMs that would have allowed people access much needed cash at that time. Hospitals that had an increased influx of patients did not have the electricity needed to power life-saving equipment. The high prices of generators which would have given an incentive to generator sellers to sell their generators to these entities (grocer, banks and hospitals) were no longer available.
A story by Professor Russ Sobel who witnessed this phenomenon (as recounted by economist Howard Baetjer) proves instructive:
My neighbor was high school best friends, years ago, with the now owner of a local hardware store. The store had two generators. He didn’t get the store open before the price controls took effect. So he was faced with them. He kept one for his family and sold the other at the controlled price to my neighbor (like 1/10th of the free market price). My neighbor’s daughter (who was my age . . . the “girl next door” cutie) was blow-drying her hair on it and my dad was going over to use his electric shaver. In the meantime, the gas station, the grocery store, the bank (with an ATM), and Kmart were all without power .
What a waste of a scarce resource.
Another important lesson about prices is that they direct resources to those parts of the economy that need them the most, preventing the shortages and wastages that happened in Charleston in 1989.
So, what do all these have to do with the Coronavirus?
This virus which, according to the World Health Organization (WHO) originated in Wuhan, China has infected 480,000 people with over 20,000 reported deaths. According to one SBM Intelligence report, the death toll far exceeds that of “SARS (Severe Acute Respiratory Syndrome Virus where 774 people were killed in more than two dozen countries in 2003”.
The virus has taken a toll on global supply chains. China is the second largest economy and the world’s manufacturing hub. Hence, this virus is affecting the supply of many commodities and services. Microsoft announced that, “As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.” According to the SBM report, “Apple’s manufacturing partners, Foxconn is currently experiencing production cuts and delays, with Apple warning that it would not be able to meet sales targets for the first quarter of the year due to production delays. ” In general, if the demand for these products stays constant, their prices will increase because supply has decreased. For some products, the virus ensures an increased demand, and if supply chains are affected by the virus, the prices of those products will rise astronomically. But remember, it is these increased prices that are ultimately the solution to making those important products available. So, what are these products?
The advent of the virus has led to sensitization campaigns on personal hygiene emphasizing practices such as washing your hands, not touching your eyes, nose or mouth, the use of face masks and, among other things, the use of hand sanitizers. Hence, the demand for products like antiseptic soaps, disinfectants, hand sanitizers, and face masks has increased and so have the prices of these commodities. This is a global phenomenon.
Coronavirus in Nigeria and price hikes
Nigeria confirmed its first case of the virus last month. An Italian citizen who was in the country on business was diagnosed with the virus and is currently in isolation receiving treatment. The moment this became breaking news, many people ran to the closest drug store or supermarket to buy hand sanitizers and face masks. Essentially, not unlike the case of Charleston, South Carolina, demand for anti-contagion products in Nigeria increased. Prices of hand sanitizers shot up from a couple of hundreds of naira to, in one case, 19,950 naira. A pack of face masks increased from ₦600 to ₦4,500 very quickly.
Nigerians took to the cyber-streets (Twitter and Facebook) to protest these price increases, accusing the drug stores and supermarkets of price gouging.
One social media user said: “Hmmmm and u didn’t drop it back and carry something worth your money chai. That’s madness oooo..that store needs to be closed down, the owners are the kind of people that pray for evil to happen in Nigeria,”
Another said, “We are our own problem honestly! You make that thing expensive and people don’t buy it because they can’t afford it and they get infected and then infect you, who loses? Something that should have been made readily available and affordable, they’re hoarding and shooting the price. Na God go help us,”
Many clamored for the government to prevent the drugstores and supermarkets from increasing the prices.
Let me be clear, if any Nigerian government, state or federal, tries to institute price controls on hand sanitizers and face masks, it would be dooming many Nigerians to death if the virus becomes widespread. This is because it would lead to the ultimate unavailability of hand sanitizers and face masks.
What the increase in price has shown is that there is a need for hand sanitizers and face masks in Nigeria. The high prices incentive signals to manufacturers to address this need by increasing supply. Those in other lines of business are incentivized by the high prices to start manufacturing sanitizers and facemasks.
Enterprising university students can cross the border to Benin and other countries like Togo or Ghana where there have been no reported cases of the virus (assuming there was no border lockdown currently in place by the Nigerian government) to buy hand sanitizers and face masks at cheap rates and bring them back to Nigeria to sell.
Young entrepreneurs can create makeshift manufacturing facilities to make hand sanitizers and face masks. These might have been unprofitable to do before, but the high prices on those commodities now make it profitable.
The high prices incentivizes everyone who can make hand sanitizers and face masks available to Nigerians to make them available. This will increase the supply and eventually reduce the prices of hand sanitizers and face masks.
Before all this happens, one important thing the high prices do (which many people ignore despite the fact that it literally saves all our lives) is that they ensure we all share the limited supply of face masks and hand sanitizers available.
If the prices had not increased, those who got to the drugstore first would have bought all the hand sanitizers and face masks they could carry, leaving the rest that came after with nothing to buy. Those high prices tell two stories:
1. Something terrible or difficult has happened which has led to an increase in the demand for hand sanitizers and face masks. Hence, if you can, please make these products available.
2. Buy only what you need because something bad has happened and many other people will need to use it too. So, let’s not be selfish.
The high prices ensure that people get these messages and act accordingly whether they like it or not.
Dear Nigerians, if we are to better our country in any way at all, it is important to recognise that we cannot do this in utter ignorance of economics.
 Howard Baetjer Jr., Economics and Free Markets: An Introduction, Cato Institute, Washington DC, 2017, pp. 117–118.
 SBM Intelligence, The Potential Effect of Coronavirus on the Nigerian Economy, February 21st, 2020.
Tam Kemabonta is an economist and an engineer. He publishes the Nigeopolis, a magazine dedicated to advocating for the inalienable rights of Nigerians to life, liberty and property. Some of his work cam be found here https://medium.com/@tamalex