econ

Running head : NEGATIVE SUPPLY SHOCK

Negative Supply Shock

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Negative Supply Shock

Negative supply shocks provide enough pressure for the inflation rate to increase permanently assuming that the demand for a given product of service would remain the same or unchanged and the nature of the product is price inelastic . Using the aggregate supply - aggregate demand graph it negative supply shocks shifts the aggregate supply curve to the left of the plane leaving aggregate demand unchanged , this is shown by the movement of AS0 to AS1 curve from

the right side of the graph going to the left . By the time aggregate supply reached its limit , there will be a higher price for the concerned commodity plus a lower quantity of output in the market , shown by point a and point c . New market equilibrium price and quantity supplied start to exist in the market shown by the point e going to point b as the new equilibrium point after the negative supply shock to exist in the market . This higher inflation rate would remain still if the demand for the said commodity remains unchanged , see Appendix

Consider a scenario wherein there will be negative supply shocks of petroleum products in the market due to increasing political tension happening in the Middle East . Since oil is one of the primary products in the market and is very inelastic in nature , any changes in the amount of supply would only cause almost no change in the aggregate demand thereby creating enough room for the producers of petroleum products to increase their prices since demand would still be there in the market even if they charged by unreasonably higher prices (Moffatt , 2008 Consumers would still buy petroleum products in the market since it is plays a vital role on the operations of most machineries and automobiles in the market even if the prices would unreasonable increased by top oil producers /companies in the market . At the end of the day , negative supply shock has been providing welfare deterioration for it lowers down consumer surplus by increasing the prices of commodities and services in the market

Appendix AS1

a b AS0 c e

AD0

References

Moffatt , M (2008 . Price Elasticity of Demand . Retrieved April 27 2008 , from HYPERLINK "http /economics .about .com /cs /micfrohelp /a /priceelasticity .htm http /economics .about .com /cs /micfrohelp /a /priceelasticity .htm

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