economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

, a demand shock is a sudden event that increases or decreases demand for

goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not ...

or services temporarily. A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand.

Price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

s of goods and services are affected in both cases. When demand for goods or services increases, its price (or price levels) increases because of a shift in the

demand curve In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...

to the right. When demand decreases, its price decreases because of a shift in the demand curve to the left. Demand shocks can originate from changes in things such as

tax rate In a tax system, the tax rate is the ratio (usually expressed as a percentage) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective. These rates can also be ...

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...

, and

government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual ...

. For example, taxpayers owe the government less

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money ar ...

after a tax cut, thereby freeing up more money available for personal spending. When the taxpayers use the money to purchase goods and services, their prices go up. In the midst of a poor economic situation in the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...

in November 2002, the

Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government o ...

's deputy governor, Mervyn King, warned that the domestic economy was sufficiently imbalanced that it ran the risk of causing a "large negative demand shock" in the near future. At the

London School of Economics , mottoeng = To understand the causes of things , established = , type = Public research university , endowment = £240.8 million (2021) , budget = £391.1 milli ...

, he elaborated by saying, "Beneath the surface of overall stability in the UK economy lies a remarkable imbalance between a buoyant consumer and housing sector, on the one hand, and weak external demand on the other." During the

global financial crisis of 2008 Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...

, a negative demand shock in the United States economy was caused by several factors that included falling house prices, the

subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the col ...

, and lost household wealth, which led to a drop in consumer spending. To counter this negative demand shock, the

Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...

lowered

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

s. Before the crisis occurred, the world's economy experienced a positive global supply shock. Immediately afterward, however, a positive global demand shock led to global overheating and rising inflationary pressures.

References

{{United States–Commonwealth of Nations recessions Economic events Demand Market trends

See also

References