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What is Economic Shock?

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  • Written By: Daniel Liden
  • Edited By: Heather Bailey
  • Last Modified Date: 20 August 2016
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An economic shock is any unexpected event that has a drastic effect on an economic system. Typically, the term "economic shock" specifically refers to events that occur outside of a given economic system but still have a significant effect on the system. In some cases, however, the term is applied to significant but unexpected events that occur within the system. Shocks tend to come either in the form of supply shocks or demand shocks; supply shocks are much more common. In an economic system, "supply" and "demand" refer to the availability and desire for a particular good or family of goods on the market.

In a supply economic shock, some unexpected event has a drastic effect on the supply of a given product or service. If the supply of a given good or service decreases significantly, its cost tends to increase and its availability tends to decrease. This combination of economic stagnation and inflation is commonly referred to as stagflation. A positive supply shock, on the other hand, usually leads to an increase in availability and a decrease in price. When this occurs, it is not uncommon for supply to exceed demand, resulting in an unsellable surplus of goods.

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In a demand economic shock, on the other hand, an unexpected event suddenly and significantly alters the demand for a given good or service. The effects that this has on the economy are similar to the effects of a supply economic shock. When demand increases significantly, prices increase and availability tends to decrease; when demand decreases, price decreases and availability remains high. Sudden, drastic increases and decreases in supply or demand are referred to as positive and negative supply or demand shocks, respectively. Supply and demand shocks are both temporary in nature; eventually, the economy does return to some form of equilibrium.

An economic shock can be caused by many different events, some caused by human activity and some simply caused by chance. Natural disasters can cause economic shocks by destroying inventories of goods, destroying various means of production, or causing a sudden demand for various construction or medical supplies. The introduction of new technology can also lead to an economic shock as new technology can, in some cases, drastically increase the supply of a given product. Demand shocks usually originate from government activity; tax increases or decreases or changes in monetary or fiscal policy can lead to unanticipated changes in consumer demand.

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serenesurface
Post 3

Many people think that an economic shock is a bad thing but that's not always true. Technology causes an economic shock too, but this is a positive economic shock.

New technology makes production easier which increases output. When there is a technological advancement, a company puts in the same input but attains greater output than before. This means that productivity and efficiency has increased. This is not bad! It's desirable.

ysmina
Post 2

@alisha-- Yes, we can. There are many examples of it. Major political and social events usually cause an economic shock in the economy by affecting demand and/or supply and of course, prices.

For example, natural disasters, political events, changes in the global economy all have an impact on our national economy.

Do you remember when OPEC raised oil prices? That was an economic shock. Not only did gas prices sky rocket but many other segments of the economy was impacted as well.

The same is true with natural disasters, like Hurricane Katrina and Hurricane Andrew and foreign attacks like 9/11.

discographer
Post 1

If a political or social event has a huge affect on markets and the economy, can we call that an economic shock?

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