What is a 'Supply Shock'?

A supply shock is an unexpected event that changes the supply of a product or a 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 a commodity causes its price to spike upward while a positive supply shock exerts downward pressure on its price.

Graph depicting the effect of Supply Shock

BREAKING DOWN 'Supply Shock'

When output is increased, the price of the good decreases due to a shift in the supply curve to the right, and the reverse is true when output is decreased. 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. A commodity that is widely perceived as the most vulnerable to negative supply shocks is crude oil because most of the world's supply comes from the volatile Middle East region.

Examples of Supply Shocks

The global salmon industry is currently experiencing a supply shock. A deadly algae bloom had killed over 27 million salmon in Chilean salmon farms as of March 10, 2016. These salmon losses amounted to a supply contraction of 6.8% in 2016.

The struggles of a single firm can cause a supply shock if the company is large enough. This has been the case in the copper industry since Glencore announced in September 2015 its plans to close two major copper mines in the Democratic Republic of Congo and Zambia, removing 400,000 tonnes of copper from global output. This decision comes in response to a prolonged slump in copper prices. Therefore, this particular supply shock is considered beneficial by competing firms.

The fall in copper prices was caused by a slowdown in Chinese demand for copper, which, for the past decade, grew at an annual rate of over 10% until it dropped to 3 to 4% in 2015. This highlights how a concentrated change in demand can influence prices. A change in demand must be abrupt and perceived as temporary to qualify as a shock, as is the case on the supply side.

Events such as the recent flight of refugees from Syria caused a shock to labor supply in Syria, driving up prices. In addition, it has caused a demand shock in the countries the refugees are fleeing to, driving up prices of goods and services.

  1. Demand Shock

    A demand shock is a sudden surprise event that temporarily increases ...
  2. Shock Therapy

    Shock therapy is the financial theory that sudden, dramatic change ...
  3. Visible Supply

    Visible supply is the amount of a good that is currently being ...
  4. Supply Curve

    A supply curve is a representation of the relationship between ...
  5. Law Of Supply

    Law of supply is a microeconomic law, stating that, all other ...
  6. Reverse Culture Shock

    Reverse culture shock is a phenomenon that can occur after a ...
Related Articles
  1. Investing

    Market Shocks: What to Expect When You're Not Expecting

    Market shocks happen all the time, and are rarely predictable. The Chinese Equity Market meltdown, Brexit, and Donald Trump's election are all examples.
  2. Investing

    Goldman and Barclays Warn Of Long-Term Bear Market in Copper (GS)

    Goldman Sachs and Barclays have both warned of an imminent supply glut about to hit the global copper market.
  3. Investing

    How Long Can Gas Stay Cheap?

    The current gas prices means a lot for the economy and our pockets. Let's explore how long we can expect gas prices to be low, what affects gas prices, and what changes might be in store.
  4. Insights

    A Credit Crisis Can Have an Upside and a Downside

    Find out how a credit crisis can be a learning experience for society.
  5. Insights

    How supply and demand affects inelastic goods

    Find out how the laws of supply and demand function for goods and services that are considered highly inelastic, including goods not yet discovered.
  6. Personal Finance

    Considering a Career in Supply Chain Management

    Supply chain managers ensure that global companies can coordinate sources of materials, labor, and manufacturing to successfully bring products to market.
  7. Investing

    Why You Can't Influence Gas Prices

    Neither big oil companies nor consumers are responsible for oil prices: it's basic economics. Find out why you can't influence the price of gas.
  8. Insights

    Cost-push inflation versus demand-pull inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  9. Investing

    3 Ways To Lower Gas Prices

    Gasoline is expensive. From increasing overall supply to lowering demand, there are a few ways gas prices could drop.
  1. Why do supply shocks occur and who do they negatively affect the most?

    Take a deeper look at the nature of supply shocks, an economic phenomenon that dramatically changes the equilibrium level ... Read Answer >>
  2. What are some common examples of demand shock?

    Learn about some common examples of demand shock. Find out how demand shocks lead to surprisingly rapid increases or decreases ... Read Answer >>
  3. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  4. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  5. How Does the Law of Supply and Demand Affect Prices?

    Learn how the law of supply and demand affects prices, as when one outweighs the other, prices can rise or fall in response. Read Answer >>
  6. How does the law of supply and demand affect the housing market?

    Learn about the law of supply and demand, the relationship between supply and demand, and how it affects the housing market. Read Answer >>
Trading Center