The caselet given after the questions describes the situation of shortage of Liquid Medical Oxygen (LMO) due to rising Covid-19 cases in India. Answer the following questions in reference to it:

1. Show the rise in price through the demand and supply curves of LMO. (CLO-1, 2 marks)

2. Price ceiling has been increased to Rs 25.71 per cubic metre. Why? (CLO-1, 2 marks)

3. Comment on price elasticity of demand of liquid oxygen for medical use versus industrial use. (CLO-1, 1 marks)

4. Faced with uncertainties in demand, the manufacturer wishes to estimate the demand for labour. If he plans to increase the number of hours of plant operations, he needs to hire more labour. Increased demand for labour has led to rise in wage rate to Rs 500 per day. If the company wishes to charge a price (equal to Marginal Revenue) Rs 25 per cubic metre and the production data is as given below, how much labour would you advise him to hire. (CLO-3, 3 marks)

Labour

Total Product

1

40

2

60

3

75

4

85

5

90

6

92

5. Could the manufacturers apply linear regression model to estimate the demand for LMO for the months of August, September and October? (CLO-3, 2 marks)

The Caselet

In order to deal with shortage of medical oxygen and the resultant increase in prices in the country, the National Pharmaceuticals Pricing Authority (NPPA) has put a cap on the ex-factory price of liquid medical oxygen (LMO) and filled cylinders for six months. The ex-factory price of LMO at the manufacturers' end has been capped at Rs 15.22 per cubic metre, exclusive of GST, while the ex-factory cost of a medical oxygen cylinder has been capped at the fillers' end at Rs 25.71 per cubic metre, exclusive of GST, as against the existing ceiling price of Rs 17.49 per cubic metre. However, it is subject to the transportation cost fixation at the state level.

The move by the NPPA comes after a three-fold increase in the price of medical oxygen gas. The authority said that the demand for medical oxygen had gone up almost four times, from 750MT/day to 2,800 MT/day. Besides, delivery through cylinders has increased from 11% pre-Covid to 50% of current oxygen supply, leading to an exponential rise in prices. "This has caused a strain at all levels in the value chain of production and supply, especially for distant and interior districts based on terrain and distance."

The NPPA said that use of oxygen for medical purposes from the overall production has also significantly increased. "Currently, during the Covid-19 pandemic, around 50% of the total liquid oxygen production is used for medical purposes in comparison with around 15% usage during the pre-Covid period. Liquid oxygen is being diverted from industrial use to medical use to cope with the additional demand. Many states/UTs are dependent on the medical oxygen supply from other states/UTs. To meet the enhanced requirement, medical oxygen is being supplied to remote areas of the country after incurring additional cost on transportation," it added.

With no oxygen for industrial use in Nashik, Pune and Pimpri-Chinchwad, many industries are closing down sections that use it, while others such as fabrication will shut completely till the situation normalises. Pimpri-Chinchwad Small Industries Association, in a letter to the state government, demanded that a 100-tonne oxygen plant for industrial use be set up immediately in Pune. Association President Sandeep Belsare said there are 35,000 small, medium and large industries in Pimpri-Chinchwad, Chakan and Talegaon. An oxygen cylinder is available with much difficulty in the black market for Rs 900-1,000, he said. Around 400 tonnes of oxygen is required daily for industrial use, said Belsare. "We have come to a point where industries are shutting down sections or entire fabrication, plastic units for want of oxygen. The government must on a war-footing set up a 100-tonne oxygen plant in Pune exclusively for industrial use," he said. In Sinnar, the steel industry hub in Nashik, production had been hit badly, said Varun Talwar, President Ambad Industries and Manufacturing Association, adding that the government should have foreseen the rise in demand for oxygen from hospitals and implemented measures such that both healthcare and industry did not suffer.

"Cutting of steel requires oxygen, so manufacturing of doors, bonnets for local automobile industries like Mahindra & Mahindra has been hit. The situation is so grim that production of beds for hospitals is affected, as there is no oxygen to cut steel. In the last 10 days, 40% steel units have shut down, and the rest will follow soon," he warned.

Getting oxygen from Gujarat entails high risk, as it could be seized by government and offered to hospitals. Talwar said production in September had risen to 60-65% as against 50% in August, but was now falling. Deepak Karandikar, vice-president, Mahratta Chamber of Commerce and Industry, said setting up a new plant would take time.