Demand Shock

DEFINITION of 'Demand Shock'

A sudden surprise event that temporarily increases or decreases demand for goods or services. A positive demand shock increases demand, while a negative demand shock decreases demand. Both positive and negative demand shock have an effect on the prices of goods and services.

BREAKING DOWN 'Demand Shock'

When demand for a good or service increases (decreases) the price of that good or service typically increases (decreases) due to a shift in the demand curve to the right (left). This type of shock can come from such things as tax cuts or increases, loosening or tightening of the money supply and increases or decreases in government spending.

For example, a tax cut reduces the amount of money that taxpayers owe the government and frees up money for personal spending. This money is then used by taxpayers to consume certain products and services, which bids up their prices.

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RELATED FAQS
  1. How long does the average demand shock affect pricing?

    Demand shocks are difficult to predict, quantify or categorize. "Demand shock" is the general term applied to any rapid change ... Read Full Answer >>
  2. What are some common examples of demand shock?

    Common examples of demand shocks are interest rate cuts, tax cuts, government stimulus programs, natural disasters, terrorist ... Read Full Answer >>
  3. How does a lack of demand affect financial markets?

    A lack of demand affects financial markets by leading to lower prices. The function of financial markets is to constantly ... Read Full Answer >>
  4. What are common examples of aggregate demand shocks?

    According to macroeconomic theory, a demand shock can be anything that causes a sudden and unexpected shift in the aggregate ... Read Full Answer >>
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