Supply shock – definition
A supply shock is a sudden and unexpected change in a cost variable, such as oil prices, commodity prices or wages. Shocks may be ‘negative’ or ‘positive’. Supply shocks may wear their way out the economic system quickly, leading to a one-off effect, or they may create an extended period of turbulence. For example, the oil shocks of the 1970s were so significant that their effects were extreme and long lasting.
Graphically, it is common to show a negative supply shock with a leftward shift in the aggregate supply curve. In this case, the shock would trigger cost-plus inflation while at the same time causing a fall in real national income – a combination of effects referred to as ‘stag-flation’.