Supply shock

A supply shock is an event that suddenly changes the price of a commodity or service. It may be caused by a sudden increase or decrease in the supply of a particular good. This sudden change affects the equilibrium price.A negative supply shock (sudden supply decrease) will raise prices and shift the aggregate supply curve to the left. A negative supply shock can cause stagflation due to a combination of raising prices and falling output.

A positive supply shock (an increase in supply) will lower the price of said good and shift the aggregate supply curve to the right. A positive supply shock could be an advance in technology (a technology shock) which makes production more efficient, thus increasing output.

An example of a negative supply shock is the increase in oil prices during the 1973 energy crisis.

Generally, supply-shock inflation triggers not only the increase in the price of the core product, but also other products that are closely associated. As in the case of the rise in the price of oil, the auto industry was effected by the inflation within the oil industry. This meant that the prices for automobiles began to increase. In addition, the cost for auto parts began to creep up, which in turn made it necessary for mechanics to charge more for their services in order to cover the increased cost of securing material to repair vehicles.

In economic shock therapy  refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets.

There are two types of shock therapy. The first was championed by economist Milton Friedman and which later became absorbed into the group of ideas that formed neoliberalism. The second was championed by economist Jeffrey Sachs. The chief difference between the two types of shock therapy is the emphasis on economic liberalization. Neoliberal shock therapy views economic stability as an outcome of economic liberalisation, while Sachs shock therapy views liberalization as a necessary means to economic stabilization.

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Supply Shock Mean is a sudden surprise event that increases or decreases output temporarily.Reduction in the productive capacity of an economy, caused either by the reduced availability of factor inputs or by a reduction in their productivity.