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Impact Of Covid-19 On Supply Chain And Production

1. Introduction - Impact Of Covid-19 On Supply Chain And Production

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The emergence of the Covid-19 pandemic not only affects the health but also global economics. The outbreak of Covid-19, primarily affected face-to-face interaction, which indirectly affected economic production. Furthermore, due to lack of production, the supply chain has also been impacted due. The majority of supply chain activities such as a supply of raw material inputs and final goods have affected the supply of goods and services in domestic economies. Lack of materials and inputs has affected output growth of several sectors such as the construction sector, retail sectors, and other manufacturing sectors. The aim of the study is to assess the impact of the Covid-19 on the cost of production, prices, elasticity, and equilibrium. 

2. Current scenario in the UK

The outbreak of the Covid-19 pandemic has implied lockdown in the UK, which resulted in a forced shutdown of all economic activities in the UK as well as in other countries in the world. The lockdown has affected the growth of the UK economy instantly. However, the impact was seen in both the short-term and long term. The lockdown has negatively affected the income of people, which indirectly affected the demand for goods and services, as income is one of the factors of demand. Due to declining demand, many sectors were facing a loss in revenue. The manufacturing firms, retailers have to bear fixed costs as although the production was nil. However, after lockdown, the supply chain was not effective in efficiently supplying materials and inputs for production efficiently. This affected the construction sector, retail sectors and manufacturing sector of the UK. Moreover, due to lack of supply, the price of materials was also increased, which affected the profitability of business sectors. The high price of inputs has influenced the prices and further reduced demand for goods and services. Here not only the price materials are not responsible. The price rise of fuel has also contributed to the inflation of goods and services. 

 3. Impact on supply chain

The reasons behind the supply chain disruption are production-shipping activities have been stopped. Due to the stoppage of production, a majority of the supply chain activities has been disrupted and this results in a shortage of inputs and materials. As a result, the cost of production increased and indirectly the price of goods has been increased. Not only inputs but also the supply of fuel has declined as the demand for fuel was nil during the lockdown period. As a result, oil exploration was reduced, but after reopening the as the demand rises the supply was unable to supply enough quantity of fuel which implied an excess demand and price reached to highest. The high prices of fuel have influenced the cost of production as the cost of transportation was increased.

Similarly, production of all sectors was almost nil during the covid-19 lockdown, and the level of inventories was also lower as the demand was lower. In the reopening of the economy, the demand for goods and services increased, but the inventories were not sufficient to meet the demand for goods and services, which affected the price of goods and services. The aggregate demand for goods and services further declined as per the law of demand. Further production was not efficient to research to the pre-pandemic level. As a result, economic output has grown by 0.8% 2021 in August 2021. However, produced output level was still 1.3% lower compared to the level of production in February 2020, which is considered as a pre-pandemic period (Ons.gov.uk, 2021b).

As figure 3.1 shows that output was declined due to the emergence of the Covid-19 pandemic the output of the economy has faced a sharp decline. However, after the reopening of the economy, the output could not reach the previous level, as there was a supply shock. 

 4. Supply of inputs

Lack of supply has affected the sectors, which were suffering, such as the construction sector, manufacturing sector. The output of construction was declined by 0.2% in August 2021 (Ons.gov.uk, 2021b). Due to lockdown, demand for new projects did not increase significantly. The reason behind the decline in output of the construction sector was input shortages, which caused supply chain disruptions. Supply chain disruption increased the prices of products and became the reason for declining demand. Figure 4.2 represents that the price of construction was increasing over time; however, the degree of price rise was more after the reopening of the UK economy. The annual growth rate of output prices was 3.8% construction in June 2021 (Ons.gov.uk, 2021c). The major reason behind the rise in price was the shortage of inputs. Due to a lack of supply of materials, the cost of production has increased.

5. Impact of Covid-19 on Cost of production

The total cost of production defines the cost for production or manufacturing products whereas average cost refers to the cost of production for a single unit of product. After the reopening of the UK economy, the cost of production has increased significantly. The majority of the manufacturers and producers are facing a high rise in the price of inputs. However, the major price rise was seen in raw materials and metals (Forbessolicitors.co.uk, 2021). Besides, the price of oil has also increased which implies that the cost of transportation has increased. As a result, the overseas exports were becoming costly which affects the cost of raw materials. Moreover, the price was also increasing as the global supply chain was supply-chain was disrupted. The global economy also faces issues due to high demand for raw materials globally whereas there is a shortage of raw materials.

The rise of raw materials is a combined effect of higher costs and lower utilization capacity. Additionally, the safety protocols of the Covid-19 also influence the cost of raw materials as it insists to stop production during the lockdown. The variable cost of production includes the cost that is required to produce and it varies with the amount of quantity of production. The fixed cost of production includes the cost of production rent and internet of machinery, land and other capital. During the lockdown, the manufacturing firms had to bear as the production was stopped. Hence, the fixed costs are not influencing the cost of production, as the fixed cost has not risen significantly (Theguardian.com, 2021). The reasons behind the increasing cost of production were mainly the variable cost of production, which is being increased due to the rise in raw materials. The variable cost of production is varying with the changes in producing products. It includes the cost of inputs, raw materials, and wages. As the input and raw material, prices have increased over time.

The long-term cost of production has been observed that the factor prices are increasing over the period, it can be estimated the long-run cost curve is less volatile as it does not reflect the shorts term volatility. However, the short-term supply curve is highly volatile due to the supply chain crisis.

Figure 5.2 shows that the diesel prices from 2000 to 2020 in the UK. It can be observed that the chart is less volatile. This is because of the change in fuel prices are less. However, it affects the cost of production less as result prices of products also are changing less in a long period. Fuel prices are one of the factors, which influence the cost of products via increasing the cost of transportation and inflation in long term. 

Figure 5.3 represents the diesel prices since 2016, which represents that the volatility is higher as compared to the long-run fuel price in figure 5.2. The difference between the “long-run average cost curve” and “short-run cost curve” is that the prior one of less elastic compared to the latter one. A firm, which faces loss in the short run, decides to operate its business, as the “long-run average cost curve” is more elastic. However, if a firm is not able to make a profit due to high competition, that is a subnormal firm, can shut its business. This situation is referred to as the shutdown point.

Due to the high rise in production costs, the profitability in the business sectors is facing a decline in profit, as the profit is different between the product price and average cost (Dean et al. 2020).

6. Impact on elasticity and equilibrium

Elasticity of price" is representing changes in demand for a good due to a rise in price. As the has observed that due to the emergence of the Covid-19 pandemic the income of the parole has declined as a result consumption expenditure of people has declined. The aggregate spending by households has faced negative growth. The degree of declining spending is 1.7% in Q4 2020, which is also lower as compared to the spending level in Q3 2020. In addition, the spending level is 9.2% lower as compared to Q4 in 2019 (Ons.gov.uk, 2021d). However, the spending level was growing from 2008 to 2019, and the declining rate signifies that the emergence of the Covid-19 pandemic has impacted aggregate demand for products, which is represented in figure 6.1.

Table 6.1 represents the growth rate in consumptions expenditure in the UK. As per the data is showing the cost consumption expenditure has forced a decline in the growth rate of final consumption. It is obvious that the decline in “growth of final consumption” is lower as demand for products is lower.

In addition, the production cost has increased over a period. Hence, inflation has also increased as the "cost of production" increases. The main reasons behind this are the rise in the prices of fuel and the shortage of materials. It has pushed the inflation rate as a result price level increased although the demand is lower. Figure 6.2 represented the inflation rate in the UK. The "Consumer Prices Index" or CPI has risen by 5.1% in November 2021. The CPI has grown by 4.2% by October 2021 (Ons.gov.uk, 2021f). The rise in CPI is the highest rate of inflation since 2011. In September 2021, the CPI was grown by 5.2%.

The equilibrium represents that the point where the demand for product meets supply for product and determines the price. Any changes in the demand or supply of products affect equilibrium and affect prices. For example, during the lockdown of Covid-19, the demand for fuel has faced a sharp decline, which affected the equilibrium. As per the law of demand and supply, equilibrium has changed as a result the price for fuel started declining. Figure 5.3 represented that decline in the price of fuel during Q2 2020 when Covid surged the economy.

7. Conclusion

It can be concluded that the inflation in the UK is a combined effect of a shortage of materials as well as a high rise in fuel prices. The cost of production has been impacted most due to the rise in the price of materials. It has been observed that the aggregate demand for products has been declined due to the Covid-19 and its lockdown. The reason behind the shortage of materials is that the Covid-19 pandemic has forced to impose lockdown; which prevented production as well as other supply activities due to shopping issues. When economies reopened the supply chain activities faced a sudden rise in demand and the supply was unable to meet the globally rising demand as a result excess demand situation was created and prices have increased at a high price. In another hand, aggregate demand for products has faced a decline due to declining income as a result; inflation has negative impact on the economy of the UK.


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