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SUPPLY SHOCK:

A disruption of market equilibrium caused by a change in a supply determinant and a shift of the supply curve. A supply shock can take one of two forms--a supply increase or a supply decrease. This is one of two disruptions of the market. The other is a demand shock.
A supply shock to the market results when the supply curve is shifted due to a change in one of the five supply determinants--resource prices, production technology, other prices, sellers' expectations, and number of sellers.

The supply shock comes in two varieties.

  • Increase in Supply: This is a rightward shift of the supply curve. It generates a decrease in the equilibrium price and an increase in the equilibrium quantity.

  • Decrease in Supply: This is a leftward shift of the supply curve. It generates an increase in the equilibrium price and a decrease in the equilibrium quantity.

Supply Increase

An increase in supply can result from a change in any of the five supply determinants.
  • Resource Prices: A decrease in resource prices.
  • Production Technology: An increase in production technology.
  • Other Prices: A decrease in the price of a substitute-in-production or an increase in the price of a complement-in-production.
  • Sellers' Expectations: Expectations by sellers of a decrease in the price in the future.
  • Number of Sellers: An increase in the number of sellers in the market.
Increase in Supply


The comparative static analysis of an increase in supply is illustrated in the exhibit at the right. The market is disrupted when one of the five supply determinants listed above causes an increase in supply and a rightward shift of the supply curve. This can be seen by clicking the [Supply Increase] button. The result of this disruption, given the original equilibrium price, is a temporary surplus (click the [Surplus] button).

The surplus then induces a decrease in the price (click the [Price Decrease] button). The price decrease causes an increase in quantity demanded and a decrease in quantity supplied. The result of these quantity changes is a new equilibrium at a lower price and a larger quantity. Click the [New Equilibrium] button to display this outcome. The comparative static analysis reveals a decrease in the equilibrium price and an increase in the equilibrium quantity.

An increase in supply results in an increase in the equilibrium quantity. The supply shift means that sellers want to sell more. Buyers are willing to accommodate sellers. However, to appease their increased supply, buyers must pay a lower price in accordance with the law of demand.

Supply Decrease

A decrease in supply can result from a change in any of the five supply determinants.
  • Resource Prices: An increase in resource prices.
  • Production Technology: A decrease in production technology.
  • Other Prices: An increase in the price of a substitute-in-production or a decrease in the price of a complement-in-production.
  • Sellers' Expectations: Expectations by sellers of an increase in the price in the future.
  • Number of Sellers: A decrease in the number of sellers in the market.
Decrease in Supply


The comparative static analysis of a decrease in supply is illustrated in the exhibit at the right. The market is disrupted when one of the five supply determinants listed above causes a decrease in supply and a leftward shift of the supply curve. This can be seen by clicking the [Supply Decrease] button. The result of this disruption, given the original equilibrium price, is a temporary shortage (click the [Shortage] button).

The shortage then induces an increase in the price (click the [Price Increase] button). The price increase causes a decrease in quantity demanded and an increase in quantity supplied. The result of these quantity changes is a new equilibrium at a higher price and a smaller quantity. Click the [New Equilibrium] button to display this outcome. The comparative static analysis reveals an increase in the equilibrium price and a decrease in the equilibrium quantity.

A decrease in supply results in a decrease in the equilibrium quantity. The supply shift means that sellers want to sell less. Buyers are willing to accommodate sellers. However, to appease their decreased supply, buyers are willing to pay a higher price in accordance with the law of demand.

Summarizing the Changes

ShiftQuantity
Change
Price
Change
Supply IncreaseIncreaseDecrease
Supply DecreaseDecreaseIncrease
Comparative static results of the two supply shocks are summarized in the table at the right. A key observation is that equilibrium quantity moves in the SAME direction as the change in supply. If supply increases, then equilibrium quantity increases. If supply decreases, then quantity supplied decreases.

However, because the demand curve does NOT shift, the market is constrained to move ALONG the demand curve and follow the law of demand. If the quantity increases, then the price decreases. If the quantity decreases, then the price increases.

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Recommended Citation:

SUPPLY SHOCK, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: April 24, 2018].


Check Out These Related Terms...

     | supply increase | supply decrease | demand shock | demand increase | demand decrease |


Or For A Little Background...

     | supply determinants | comparative statics | ceteris paribus | economic analysis | graphical analysis | supply curve | equilibrium | equilibrium price | equilibrium quantity | market equilibrium | change in supply | change in demand |


And For Further Study...

     | demand and supply increase | demand and supply decrease | demand increase and supply decrease | demand decrease and supply increase | price ceiling | price floor | demand determinants |


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