Supply Shock

Posted: October 17th, 2013

Supply Shock

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Supply Shock

Definition

A supply shock is that event that exerts a sudden change to the market price of a given commodity or service. This abrupt change can be because of an increase or a decrease in the supply of that particular commodity or service. This sudden change hence has a changing effect on the equilibrium price, either positive or negative (Thornton, 2003).

Source: Emerald Group Publishing Limited

When the output towards a commodity is increased or decreased, the price of the commodity will decrease or increase respectively. This can be attributed to a rightward shift of the supply curve. The diagram above represents an increase in the price of a commodity because of a decrease in its supply (Fisher, 2007). A supply shock can result from an abrupt event that limits output or causes disruption of the supply chain.

Beneficial and Adverse Supply Shock

Beneficial or adverse supply shocks have a major difference exhibited by their effect on a product or commodity’s price. A beneficial supply shock results to economic forces that exert a downward force causing the price of the affected commodity to decline. On the other hand, an adverse supply shock results to economic forces that have an upward pushing effect on the prices of the affected commodity. In both cases, the assumption held is that demand will be considered constant (Thornton, 2003).

Reference

Fisher, B. (2007). The supply and demand paradox: A treatise on economics. North Charleston, S.C: Book Surge.

Thornton, J., & University College of North Wales. (2003). Money supply shock and the demand for money: A test of alternative hypothesis. Bangor: University College of North Wales, School of Accounting, Banking and Economics.