Supply Shock: Definition & Examples

Instructor: Shawn Grimsley
If a hurricane knocks out a few offshore oil rigs, you may see a run on gas stations because of a supply shock. In this lesson, you'll learn about what a supply shock is and be given some examples. A short quiz follows.

What is a Supply Shock?

A supply shock is a dramatic reaction to the price of a good or product because of some event that makes people believe that the supply of a product or good will drastically change in the future. A price shock could cause a dramatic increase or decrease in price, but it's often an increase. It's important to understand that the market's perception of future supply is very important in the creation of a supply shock. In fact, sometimes perception is more important than reality in this circumstance. The opposite of a supply shock is a demand shock.

Examples

Let's look at a few examples of supply shock. We'll start with an historical example.

  • In 1990, the United States invaded Kuwait to stop Iraq's military aggression against Kuwait. Both Iraq and Kuwait are major world suppliers of oil. The market reacted adversely to the U.S. invasion out of fear that the supply of oil would decline substantially. Prices rose dramatically for some months until declining again once it was clear that the war would not have much effect on the oil supply.
  • Imagine that it's been an abnormally cold year down south in Florida. A frost warning is predicted on Friday morning that threatens to destroy nearly the entire orange crop for the season. The commodities market in Chicago goes wild and the prices of oranges skyrocket by the end of Friday. Grocery stores also react by jacking up their prices on oranges and orange juice over the weekend. The Florida orchard owners were able to stave off most of the harm through use of portable heaters and most of the crop was saved. On Monday morning, the prices of oranges decline back to about where they were before the weather forecast of Friday.
  • The U.S. is having a difficult time with another country that imports a type of beer that is beloved by many beer drinkers. In fact, the U.S. has threatened to embargo all of the country's imports of beer - not allowing the beer to come into the country for sale. This starts a run on the beer at all the grocery and liquor stores that offer it. Of course, these retailers take advantage of the beer crisis and increase the price of the beer until the crisis is over and the embargo threat does not come to fruition.

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