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What are supply shocks?

Explain what effect adverse and favorable supply shocks have on the supply curve.

Give an example of a supply shock that has affected the U.S. economy on more than one occasion.

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions


For each of the following economic "shocks" draw and label a supply and demand diagram to show the original equilibrium and the new equilibrium after the "shock" has occurred.

Shock #1. A freeze in south Florida damages the orange crop. Show the effect on the market for orange juice.

Shock #2. Obama refuses to release permits for an oil pipeline that would carry Canadian oil from Canada to the USA. Show the effect on the future US market for gasoline.

Shock #3. Popularity is resurgent for Pokemon trading cards. Show the effect on the market for pokemon trading cards.

Shock #4. Apple decides to triple the number of iPods that they produce each year. Show the effect on the market for iTunes music downloads.

I want to know which curve should be changed in 4 different shocks.

Also, I want to know detailed information about why it should be changed.

For instance, if the supply curve should be changed in Shock #1, I want to know why It changed.

Dalum Papir A/S is almost halfway through its second century as a Danish paper manufacturer. Years ago, the firm was one of many paper companies, but now it constitutes one- half of Denmark's two-firm paper industry. The company utilizes highly energy-efficient techniques to manufacture glossy paper from recycled materials for magazines. Dalum Papir has had little choice but to conserve energy. Government taxation has boosted energy prices more than 45 percent above the U.S. level. Also, like other Danish firms, Dalum Papir must meet government-mandated standards for energy conservation.

Ever since the 1970s, when a worldwide spike in oil prices set off a prolonged recession, Denmark's government has sought to shield the nation's economy from future aggregate supply shocks induced by jumps in energy prices. Toward that end, it has enacted high energy taxes and tough regulatory conservation measures. A consequence is that Danish oil consumption per $1 million of real GDP has declined by more than 30 percent - to 120 tons o oil per $1 million of real GDP - over the last 30 years. Indeed, Denmark's total oil consumption has remained unchanged since the late 1970s. Thus, consistent with the government's intent, whenever oil prices suddenly shoot up, Denmark's economy tends to experience smaller aggregate supply shocks than it did in years past.

As the experience of Dalum Papir and the dwindling Danish paper, industry illustrates, however, the government's quest for aggregate supply stability has come at the cost of growth in the production of goods and services. Since the late 1970s, Denmark's real GDP has doubled, whereas U.S. real GDP has quadrupled. During that period, total U.S. oil consumption has increased by more than 40 percent, yet because U.S. real GDP has increased fourfold, U.S. oil consumption per $1 million of real GDP has fallen by more than 25 percent - almost as much as the percentage decline in Danish oil consumption per $1 million in real GDP. Thus, although the Danish economy is less susceptible than the U.S. economy to aggregate supply shocks, Denmark's aggregate supply is growing at about half the pace at which the U.S. aggregate supply is expanding.

1. Why do unexpected variations in energy prices generate aggregate supply shocks, which sudden changes in total planned expenditures do not?

2. Other things being equal, why might we expect the Danish price level to be more stable over time than the U.S. price level?

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