Supply Shock

The economy lives just like us: it gets shocked unexpectedly, too. A supply shock is when there’s a sudden and dramatic increase or decrease in the amount of some good or service. This in turn affects the price of that good or service, and could suddenly affect the economy’s general price level as well. When a supply shock, business-as-usual seems to be thrown at the window, and cowboy capitalism (yee haw!) takes its place until things settle down.

An easy example to think about supply shock is whenever there’s a natural disaster. There’s a sudden supply shock with a shortage of basic necessities, like housing, food, medical care, and transportation. This can cause the prices of those things to skyrocket, and rattle the local economy even beyond the physical devastation and impact. The mess is even wider than our eyes can see at first glance.

Another, but more interesting example: when disaster struck Haiti, the US stepped in to say “Hey Haiti—we want to help. Here’s some rice, and we have more coming! Aren’t we like, so nice?!” While this may seem like a kind gesture, paradoxically, this act sent a supply shock to Haiti’s local food supply market. The US was giving Haiti rice at a cheaper price than Haitians could make and sell rice locally to themselves.

In other words: the U.S. screwed over local Haitian farmers, and made the country less self-sufficient with food by messing with their food economy. This also resulted in a wave of unemployed farmers flocking to cities to try to find work, only to find not enough space and jobs there for them. Plus, now Haiti is more dependent on aid for its food economy than it was before, purely because of economics of aide driving rice farmers out of business! As you can see, supply shocks not only affect consumers, but have ripple effects on entire industries, and sometimes the entire economy, even when the supply shock was supposed to be a nice favor.