Supply Shock

AAA

DEFINITION of 'Supply Shock'

An unexpected event that changes the supply of a product or commodity, resulting in a sudden change in its price. Supply shocks can be negative (decreased supply) or positive (increased supply); however, they are almost always negative and rarely positive. Assuming aggregate demand is unchanged, a negative supply shock in a product or commodity will cause its price to spike upward, while a positive supply shock will exert downward pressure on its price.



Supply Shock

INVESTOPEDIA EXPLAINS 'Supply Shock'

When output is increased (decreased), the price of the good decreases (increases) due to a shift in the supply curve to the right (left). The above diagram demonstrates an increase in price due to a decrease in the supply of a good relative to demand.


Supply shocks can be created by any unexpected event that constrains output or disrupts the supply chain, including natural disasters and geopolitical developments such as acts of war or terrorism. The commodity that is widely perceived as being the most vulnerable to negative supply shocks is crude oil, since most of the world's supply comes from the volatile Middle East region.

RELATED TERMS
  1. Equilibrium

    The state in which market supply and demand balance each other ...
  2. Recession

    A significant decline in activity across the economy, lasting ...
  3. Demand

    An economic principle that describes a consumer's desire and ...
  4. Supply Chain

    The network created amongst different companies producing, handling ...
  5. Supply

    A fundamental economic concept that describes the total amount ...
  6. Aggregate Supply

    The total supply of goods and services produced within an economy ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. 5 Economic Concepts Consumers Need To ...
    Personal Finance

    5 Economic Concepts Consumers Need To ...

  3. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

  4. Stagflation, 1970s Style
    Economics

    Stagflation, 1970s Style

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center