A supply shock is an event that suddenly increases or decreases the
supply
Supply may refer to:
*The amount of a resource that is available
**Supply (economics), the amount of a product which is available to customers
**Materiel, the goods and equipment for a military unit to fulfill its mission
*Supply, as in confidenc ...
of a
commodity
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a comm ...
or
service, or of commodities and services in general. This sudden change affects the
equilibrium price
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
of the good or service or the economy's general
price level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. ...
.
In the short run, an economy-wide negative supply shock will shift the
aggregate supply
In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms ...
curve leftward, decreasing the output and increasing the price level.
[.] For example, the imposition of an embargo on trade in oil would cause an adverse supply shock, since oil is a key
factor of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output (economics), output—that is, goods and service (economics), services. The utilized amounts of the various inputs determine the ...
for a wide variety of goods. A supply shock can cause
stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since action ...
due to a combination of rising prices and falling output.
In the short run, an economy-wide positive supply shock will shift the aggregate supply curve rightward, increasing output and decreasing the price level.
A positive supply shock could be an advance in technology (a
technology shock
Technology shocks are sudden changes in technology that significantly affect economic, social, political or other outcomes. In economics, the term technology shock usually refers to events in a macroeconomic model, that change the production fu ...
) which makes production more efficient, thus increasing output.
Technical analysis
![economics supply shock](https://upload.wikimedia.org/wikipedia/commons/9/9e/Economics_supply_shock.png)
The diagram to the left demonstrates a negative supply shock. The initial position is at point A, producing output quantity Y
1 at price level P
1. When there is a supply shock, this has an adverse effect on aggregate supply: the supply curve shifts left (from AS
1 to AS
2), while the demand curve stays in the same position. The intersection of the supply and demand curves has now moved and the equilibrium is now point B; quantity has been reduced to Y
2, while the price level has been increased to P
2.
The slope of the demand curve determines how much the price level and output respond to the shock, with more inelastic demand (and hence a steeper demand curve) causing there to be a larger effect on the price level and a smaller effect on quantity.
See also
*
Shock (economics)
In economics, a shock is an unexpected or unpredictable event that affects an economy, either positively or negatively. Technically, it is an unpredictable change in exogenous factors—that is, factors unexplained by an economic model—which may ...
:*
Commodity price shock Commodity price shocks are times when the prices for commodities have drastically increased or decreased over a short span of time.
Post-Napoleonic Irish grain price and land use shocks (1815–1816)
During the international Post-Napoleonic dep ...
:*
Demand shock
In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily.
A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand. Prices of goods ...
:*
Technology shock
Technology shocks are sudden changes in technology that significantly affect economic, social, political or other outcomes. In economics, the term technology shock usually refers to events in a macroeconomic model, that change the production fu ...
*
Macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
*
Stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since action ...
*
Supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
References
* Czech, Brian, ''Supply Shock: Economic Growth at the Crossroads and the Steady State Solution'', (Gabriola Island, Canada, 2013)
{{United States–Commonwealth of Nations recessions
Business cycle
Supply-side economics