Supply shocks refer to unexpected events that significantly disrupt the supply of goods and services in an economy. These shocks can be either positive or negative; a negative supply shock typically results in a sudden decrease in supply, leading to higher prices and potential shortages, while a positive supply shock can lead to an increase in supply, often resulting in lower prices. Common causes of supply shocks include natural disasters, geopolitical events, technological changes, and sudden changes in regulation. The impact of a supply shock can be analyzed using the basic supply and demand framework, where a shift in the supply curve alters the equilibrium price and quantity in the market. For instance, if a negative supply shock occurs, the supply curve shifts leftward, which can be represented as:
This shift results in a new equilibrium point, where the price rises and the quantity supplied decreases, illustrating the consequences of the shock on the economy.
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