Mapping a macro economic path via the impact of Covid-19 using simple Demand and Supply curves

A few weeks back i wrote a blog about the “high wire” shape that i predicted we would see as a function of pent-up demand and the unique set of circumstances covid-19 has created. There was much debate on twitter ( and references to a thread i’d started a few weeks on March the 31st ( prior to that , about why the use of “spend during a recession” advice by many in the marketing fraternity was inappropriate.

As lockdowns have progressed a ripple has swept through the industry with many now agreeing. Mark Ritson, JP Castlin and very recently even Les Binet have set out the same thinking. To take things on i now think its time to begin contextualising what is actually happening/happened using the wonders of Demand and Supply curves. We’re a pretty poor bunch at using techniques such as these to map out categories and positions but hopefully this could also be a simple tutorial to get people thinking about expanding their repertoire of critical thinking tools and mapping capabilities.

Obviously these are simplistic tools but they are useful in providing a theoretical base for a narrative and enable critical thinking and planning to begin. Without a model of the potential future how can you begin to create a strategy to take advantage?

Step 1 is the simple Demand and Supply curve pre covid-19 lockdown (in the UK)

We see the market in equilibrium (ceteris paribus) with price and quantities at P1 and Q2. Now lets see what happens next when Covid-19 begins to have its first impact on Supply chains globally as China gets affected first.

Supply is reduced pulling the model out of equilibrium, moving down the supply curve from a to b. In real terms the price is unlikely to have gone down as movements with D & S happen very quickly (however as we will see there is negative pressure on inflation in the real world) but you can immediately see the problem we have because Demand is still stuck at a. Too much demand and shortages of goods.

What happens next is interesting because usually the demand curve would just shift into equilibrium as follows

Demand shifts with reduced quantities (D1 to D2) and as suggested earlier further negative pressure on prices (this is why inflation has been so low). However; because of lock-down we then had an external impact on demand and further negative impact on supply D1 – D3 via D2, essentially two demand curve shifts.

This shift in demand to D3 leads to new price and quantity positions Q2 and P2 . Supply has also seen a further negative shift due to the impact on availability (sliding down that S1 curve). Physical and digital availability are constrained not just by supply chain issues but the simple fact that people cannot actually buy the goods from various platforms. It’s a point worth reiterating though, supply problems are physical availability problems (in the Ehrenberg-Bass way) .

At this point demand is down, supply is down and the economy is shuddering to a halt. This was probably April/early May in the UK, when we saw the economy shrink by 20%+

To me, this is the bottoming out of the economy, the worst it gets and the reason for this is that at this point there is a glimmer of hope in the rise of e-commerce and ingenuity of business owners. Answering the question how to get products to people if they are stuck at home/pivot exactly what their offering is…

The Ehrenberg-bass institute will tell you about physical and mental availability and how its “how Brands grow”. I’ve evolved the physical availability element a bit (apologies EB) to include “Digital availability“. This is because, whilst the EB definition is perfect, human beings aren’t and if you say “Physical” they think bricks not clicks. Digital availability as a sub-section of physical means maximising digital channels such as PPC, affiliates and e-commerce channels and establishing fulfilment (getting products out and delivered) services to support these channels.

In all the chat about advertising during a recession most people forgot one thing. Its a weak force. Yes, if you can afford it great but; for many short term activation creates instant cash. We know that brand building delivers only 50% of its cash benefit in year 1 which is great if you’re going to be around in year 4 to collect the other half but no good if you’re going to go bust before then! That’s why necessity is the mother of invention. This affects the model as we see a shift in the supply curve (s1 to S2), an increase in physical and digital availability!

This, i think, is where we are now. Point D (there or thereabouts). Demand has increased from the depths (but in real terms only marginally), supply has increased due to improved availability but we’ve seen a significant drop in price (the sales are going to be something to behold and inflation should stay low for a while) whilst quantity has shifted up a notch to Q3 from Q2 lows.

Its worth pointing out that due to the shift in the supply curve its likely that post recession the potential for the economy will be greater as demand shifts back through D2 to D1 along the S2 line you can see a greater potential equilibrium position driven by this shift in physical availabilty.

Now what’s great at creating demand? Marketing. 🙂 However maybe thats a blog for another day.

So; what to do at this stage? Obviously this is a simplistic method of analysing the situation at a macro economy level. It will be different for different categories and using this simple methodology to understand your specific positioning would be very useful. Like many things this is just one model and you’ll need to diagnose specific problems and benefits but hopefully it shows that we have more tools than we think at our disposal and simple high school economics models can still paint a picture that can add to the discussions around the table.

Anyhow, this is a theoretical exercise but one worth going through i think. It help paints a picture and its not something that we (in the industry) tend to do. Mental models help and when they correspond and support real world examples then they can only be a good thing. Like Mark Pollard is always saying “strategy is your words” well for me “strategy is my models (and sometimes my words”