Adverse supply shock

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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An unexpected shift of the supply curve to the left, i.e. a reduction in the quantity supplied for any given price. This could result from natural disasters such as floods or earthquakes; from human, animal, or plant diseases; or from major political upheavals such as war or revolution. To oil importers, the sudden price increases imposed by the Organization of Petroleum Exporting Countries in the 1970s appeared as adverse supply shocks. Such a shock reduces the *real income an economy can produce even at full employment of its available resources. Supply shocks are used as a modelling device in macroeconomics to represent aggregate economic risk.

Reference: The Penguin Dictionary of Economics, 5th edt.