Business Economics Assignment 1

Hurricane Sandy Case Study

(EPGDIB 2021 – 2022)

Submitted By Group 1 (Section A)

________________________

Ayush Sharma 08A

Bhaargav Nath 09A
Krushangi Chandekar 15A
Nittin Kakkar 21A
Assume that all consumers in New York have the following utility function 
U = U (Gasoline, All Other Goods & Services) 

Solution 1

1a) The initial equilibrium indifference curve is a U-shaped curve as gasoline and other goods and
imperfect substitutes. The diagram shows the highest attainable indifference curve with this
budget line. This is the point where the budget line and the indifference curve have the same slope
which signifies that there is optimum satisfaction reached and replacing or adding more of one
goodwill does not increase/add to the satisfaction level

So the equilibrium is a point at which the consumer did not have a tendency to re-arrange his purchases of
two goods, Consumer does not have a tendency to re-allocate the budget, Also Marginal rate of
substitution (MRS) equals the price of Pg / Price of Py.
We can explain the quantity willingly offered for sale by sellers at a given price is just equal to the
quantity willingly demanded by buyers at that same price

1 b ) The factors affecting or having an impact on demand are –

i. Supply

Due to the shortage of gasoline, we can see that the immediate demand remains the same but for the
same quantity demanded, the supply runs short and shoots the prices up resulting in a higher price of
 the commodity. Now for the same price, we get a lesser quantity.

ii. Price of commodity

With the increase in the price of commodities, we can see a right shift of the demand curve where
for the same price now we get less quantity of product.

iii. Price of complimentary

With the increase in the price of Gasoline a rise in the price of gasoline, we can see that
complementary goods like generators and grocery stores, and hotels all prices were increased as
shown
 In later stages, the demand was affected due to the regulation of putting odd/even number plates
on gasoline on certain days. That decreased the demand and allowed to ease out supply.

In this case, the problem is mostly one of supply, as demand for commodities (Gasoline) and other
services was relatively high in the aftermath of the storm, therefore the underlying issue was not one
of increasing demand. Hurricane Sandy caused havoc on New York and New Jersey's petroleum,
electrical, and food industries, endangering product and service supply. Gas stations, hotels, and
grocery stores took advantage of the increased demand by restricting their supply by charging
consumers extra money.

1 C)
Price consumption curve:- Price-consumption curve is a graph that shows how a consumer's
consumption choices change when the price of one of the goods changes. It is plotted by connecting the
points at which the budget line touches the relevant maximum-utility indifference curve

Income – consumption curve

The Income-consumption curve is a graph of combinations of two goods that maximize a consumer's
satisfaction at different income levels. It is plotted by connecting the points at which the budget line
corresponding to each income level touches the relevant highest indifference curve

Demand curve The demand curve is a graphical representation of the relationship between the price of a
good or service and the quantity demanded for a given period of time
Engel Curve graph is the relationship between the income & the qty consumed of a good or service
(closely related to ICC income consumption curve)

Solution 2

The law of demand states that (with a few exceptions) as price rises, the quantity demanded of any good
or service would be lower. The law of supply implies that the higher the price received by a supplier, the
quantity supplied will rise. Thus, demand is often a downward sloping curve in the price-quantity plane,
while supply is an upward sloping curve. The intersection of the supply and demand curve denotes the
market equilibrium, which in turn determines the equilibrium levels of price and quantity of the particular
good (or service) in the economy. If the present demand for a good (or service) in the economy is higher
than the equilibrium quantity, the situation is described as that of excess demand.
If we conduct a demand-supply analysis as described in the case study, prices will rise not only for
gasoline but also for other essential goods and services. The gasoline shortage is due to a supply issue, as
corporations or suppliers may sell less petrol as a result of a natural disaster, such as Hurricane Sandy,
when gas stations were impacted by a supply chain power loss and interruption. Due to a lack of fuel,
numerous stations were forced to close, and customers were forced to wait in long lines to acquire
gasoline at exorbitant costs.

We saw a shift in the supply curve to the left due to a lack of cash to buy gasoline and government
prohibitions that discouraged buying in other states, as well as a drop in supply without any changes in
price or quantity, and shifts in the balancing point.

Q3:
Below are the steps undertook by the government to improve the situation in New York
and other related areas:
1. The state officials mandated a rationing system. The sale of gas was carried out alternately.
Gas was sold to the cars with the license plates ending with odd numbers on odd-numbered days,
and the ones with even numbers on even-numbered days.
2. Waiving off Regulations with constraints: The State regulations also made it difficult for the
gas stations to purchase from the suppliers in out-of-the-state stations. Chris Christic, Governor,
NJ waived off the requirements for a few days, temporarily.
3. Highlighting Unlawful Act: The state officials received and attended to the overpouring
complaints about price gouging. This resulted in the officials setting the context of action with a
 warning message and reminder on the grounds of existing laws that prohibit price gouging
following emergencies. This underlined attention on all the businesses involved in the creation of
a black market, further making a strong move to warn them to stop it immediately.
4. Fine Levied: The state officials exercised a penalty mechanism for those who practiced price
gouging during the storm which will be investigated by the grand jury. The fine levied can result
in $10,000 on the first-time offense fine.

Impacts of Regulations:
1. Chris Christic, Governor, NJ waived off the requirements for a few days, temporarily. As a quick
solution, this waive-off helped the businesses and consumers to meet the supply and demands for
the time being. The ease of getting supplies from the other states was enhanced. From a
normative economic point of view, such an action was necessary for controlling the situation.
But it had temporary effects. The regulation didn’t have any legal implications on its
applicability in emergency situations like climate crises, etc. Also, the stability of the supply
chain continued to suffer.
2. Rationing, from the Normative Economic Analysis viewpoint, was effective as it was an
immediate measure and desirable because this mechanism helps in keeping consumers satisfied
to some extent. Since it was being arranged and conducted by the government; accessibility was
in place; and hence, the scope of shady businesses to shoot their prices up is understood to be
better controlled but not doesn’t resolve the price hike as the supply was limited.
3. Fine Levied: The state officials exercised a penalty mechanism for the businesses and
individuals, who practiced price gouging during the storm. Panic was created among the
businesses and individuals who practiced this going against the law. Both businesses and
individuals were targeted. This might have led to the decline of prices improving affordability.
Subpoenaing made the guilty accountable with court visits. On the other hand, scarcity gives rise
to the “Problem of Choice”; however, delay in actions intensified it leaving people grappling
with this. The announcement of a law breach was made 6 months before the fine mechanism was
announced. 6 months’ difference in word and action. This gave a lot of businesses/individuals
time to earn more and make arrangements in their favor. Hence, the desired impacts that could
have been there if action was timely were not achieved. This was more driven towards stopping
and removing an illegal act. Addressing the issue of making supply chains more effective was
still unresolved.
Do you think that was the best way to manage the crisis?
No, this wasn’t completely the best way to manage the crisis.
Rationing helped in keeping consumers satisfied to some extent on an urgent basis, controlling
panic. However, this mechanism addresses more on the allocation/ distribution (sale) of available
resources. However, the challenges at the supply end still existed. Stability of supply chain yet
suffered.
The steps implemented were not effective in eradicating issues completely or resolving them.
There could have better ways of attending to the issues, considering that there has been a
hurricane crisis prior to Sandy.
- Temporary: Some of the solutions were temporary. For example, waiving off of the state
regulations for the gas stations so they can purchase from the out of the state station suppliers
was in place only for a certain period of time. No permanent solution. Regulations should be
amended keeping in view emergency scenarios.
- Timeliness: Actions were not carried out timely. For example, the waive-off happened only after
the crisis of gas stations reached its peak. Another example is the announcement of breach of
 laws about price gouging following emergencies made at a point of time, yet the action actually
happened 6 months later& fine was levied on the guilty. This should have been immediately
attended with raids/ inspections/ surprise visits immediately after receiving the complaints.
- Affecting Delivery Capacity due to stop-gap arrangements: The waive-off also created an
inconsistency in the supply chain as the suppliers of the other states must be stocked up
according to their estimations of demand and supply for their consumers. Additional demand
may have reduced their delivery capacity.
- Businesses Suffered: Power outages affected the TAT of the businesses as they were struggling
to deliver. Such businesses being one of the existing and operational points of supply should
have been supported by the government enrolling in local businesses for quicker solutions. Prior
information of hurricane could have helped in stocking up
- Scarcity: Scarcity of goods/ services is an expected phenomenon during the crisis that gives rise
to the problem of choice. When the gas stations were out of stock, those businesses or
individuals offering limited resources on sale hiked the price. This price gouging could have
been controlled by managing the supply chain system.
- Affordability: Decline in affordability led to a downward sloping demand curve citing
consumers willing to buy less of one or more commodities or goods or services at higher prices.
Grocery stores had increased the prices of the food items by 3X, matchboxes were being sold at
$10. Hotels had hiked their process too. Consumer demands were met to an extent but whether it
was adequate or not was a question. Supply as per consumer demand was biting the pockets,
hence, not budget-friendly. This indicates a negative connection between the price of a good and
quantity demanded i.e., Law of Demand.
- People-friendly regulations: There is a dire need for regulations that can facilitate procuring
resources from the out-of-the-state suppliers, if not on a regular basis, then at least during the
emergencies so that necessary emergency stock up is maintained.
- Penalty Mechanism: Levying a fine on the guilty was a good mechanism to control black
markets and at the same time create a fright for the breach-related actions. But what role do the
fine collected plays in supporting the consumers who already faced loss is not determined?
- Loss of Time & Efforts in the course of Decision Making: The waiving off of the state
regulations for the gas stations to purchase from the out of the state station suppliers was a
temporary solution. But the balance between demand and supply was hampered during the pre-
waive off and post-waive off time periods.
- Business Delivery interrupted and affected: Gas supplies were interrupted which resulted in
gas shortages resulting in limited stocking and price hikes. A secondary or substitute supply
chain system would have been an immediate help, especially from the local resources as
proximity can add value in timely delivery. Also, the price hike could have been controlled that
way creating an inverse relationship between the supply and price of the product; and the supply
of one product and the price of the second product.
Initiatives were more focused on refraining businesses from gouging prices and shutting down
the black markets. However, these weren’t immensely effective as they did not resolve the main
factor(s) that gave rise to black markets/ shady businesses. These initiatives weren’t also
attending to larger issues post-hurricane-like shutdowns of businesses, loss of jobs, price of
medical supplies, etc.