South-Western College Publishing - Economics  
The Economics of Nature Are, Unfortunately, Hard at Work in Indonesia
Subject Recent tsunami in Indonesia has wreaked havoc on the regional economy.
Topic Equilibrium, Supply and Demand  
Key Words

prices, shortages, wages, workers.

News Story

Indonesians are discovering that the laws of supply and demand aren’t put on hold, even in the event of catastrophe like the one recently visited upon their country and others in the region..

The laws of supply and demand are seen most starkly in the local housing markets: Nearly half of the homes in hard-hit Banda Aceh were destroyed, leaving many living in tents set up around the city. Not only did these people need housing, but all of the volunteer aid workers flooding into the cities needed shelter as well. Rents soared. Individuals whose houses were spared discovered that rental rates for their homes increased by almost a factor of five. One individual with a four-bedroom home discovered that his house that could have rented for $300 per month before the tsunami actually rented out for $1,400 per month to an aid organization.

Firms are also seeing their workers being taken away by the higher wages paid by foreign aid organizations. Not only did firms lose workers in the tsunami’s wake, but aid organizations who need local assistance are hiring available workers away for wages much higher than Indonesians are prepared, or even able, to pay.

Food prices are also fluctuating wildly. Fish prices are down, due to fears of disease: fish may have eaten corpses washed away by the water. Beef prices are much lower, owing to similar fears of disease from tainted water. Salt prices are much higher, because salt plants near the ocean were destroyed.

It will be some time before Indonesians can become comfortable with the results of supply and demand again.

Questions
1. Illustrate with a graph of supply and demand what is happening in the market for labor as described in the summary.
2. Illustrate with a graph of supply and demand what is happening in the market for housing, as described in the summary.
3.

Illustrate with a graph of supply and demand what is happening in the market for beef, as described in the summary.

Source

Michael M Phillips. “Tsunami in Sumatra Has Turned Economy Upside Down, Too.” The Wall Street Journal. 26 January 2005. A1+. http://www.wsj.com.

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