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 co ...

or service, or of commodities and services in general. This sudden change affects the equilibrium price 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 fir ...

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—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rel ...

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 actio ...

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) which makes production more efficient, thus increasing output.

Technical analysis

The diagram to the left demonstrates a negative supply shock. The initial position is at point A, producing output quantity Y₁ at price level P₁. When there is a supply shock, this has an adverse effect on aggregate supply: the supply curve shifts left (from AS₁ to AS₂), 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 Y₂, while the price level has been increased to P₂. 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.

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

Technical analysis

See also

References