Supply and Demand-Side Shocks
Like lightning to the system ...
Supply-Side Shock: sudden impact upon supply disrupts production patterns
Demand-Side Shock: sudden impact upon demand disrupts consumption patterns
Might be impacted upward or downward:
Negative supply-side shocks are associated with increased costs of production
Positive supply-side shocks are associated with decreased costs of production
Negative demand-side shocks are associated with reduced demand
Positive demand-side shocks are associated with increased demand
Negative supply-side shocks tend to be inflationary
-rising costs of production often reflected in market prices / passed-on
Positive demand-side shocks tend to be inflationary
-sudden increase in demand not matched by output may result in overheating: prices bid-up
Can affect trend-rates of economic growth:
-increased costs of production might cripple ability of firms to generate output
-reduced costs of production might allow firms to increase output
-increased spending might help boost an economy
-decreased spending might cause an economy to stagnate
By no means exhaustive list of possible supply-side shocks:
-oil price increase or fall: possible causes include sanctions, destruction, or discovery of oil wells
-sudden increase in taxes increases costs of production
-sudden reduction in taxes decrease costs of production
-certain component outlawed / subject to additional regulation: harder to acquire
-certain component legalised: simpler to acquire
-increase in minimum wage legislation drives-up costs
-decrease in minimum wage legislation drives-down costs
By no means exhaustive list of possible demand-side shocks:
-house price bubble crashes: demand for property crashes
-positive news story about health benefits of some product may lead to surging demand
-international recession might hurt exports
-international boom might increase exports
-unwillingness of banks to lend might stymie borrowing: consumption and capital investment may slow
-increased willingness of lenders to reduce interest rates might boost borrowing and consumer spending
In practice, the supply-demand demarcation is perhaps too rigid. Disturbances tend to ripple-through - meaning a great deal of overlap:
-the outbreak of war is liable to shock consumer spending and supply both
-sudden increases in minimum wage legislation might negatively shock supply, but increase demand upwardly
-oil price hikes tend to hit producers first, such that oil prices feature in production costs - ‘pain at the pump’ might result in sudden reduction in consumption as households feel worse-off
Shocking!