What is a demand shock (short answer)
A demand shock is an unexpected event that causes demand for a good or service to jump or collapse quickly. A positive demand shock raises demand; a negative demand shock lowers it. Because supply usually cannot adjust instantaneously, such shocks commonly move prices and quantities in markets until producers and consumers adjust.
Key concepts and plain definitions
– Demand shock: a sudden, large change in buyers’ willingness or ability to purchase a product or service.
– Positive demand shock: demand rises rapidly (shift of the demand curve to the right).
– Negative demand shock: demand falls rapidly (shift of the demand curve to the left).
– Supply shock: a sudden change in supply (separate concept; can be a cut or a surge in supply).
– Market adjustment: higher prices or increased production typically follow a positive shock; lower prices or reduced production follow a negative shock.
How a demand shock works (mechanics)
– In standard supply-and-demand diagrams, a demand shock shifts the entire demand schedule right (positive) or left (negative).
– With fixed supply in the short run, a positive shock creates excess demand (shortage) and pushes prices up until demand slows or supply increases.
– The magnitude of the price response depends on how responsive suppliers and buyers are (elasticities) and on how durable the shock is.
Common causes of demand shocks
– Policy actions: large fiscal stimulus, tax cuts, or abrupt changes in government purchases.
– Income shocks: sudden change in employment or transfers to households.
– Preferences/technology: a new product or fad that suddenly becomes popular, or a new technology that reduces demand for an older one.
– News, recalls, and reputation: a viral review or safety recall can rapidly reduce demand.
– Anticipatory buying: people stockpile ahead of a forecasted event (storms, lockdowns).
– Macroeconomic events: recessions, rapid recoveries, or pandemic-related changes in behavior.
Worked numeric example (simple linear market)
Set up:
– Demand: Qd = 200 − 5P
– Supply: Qs = 50 + 3P
Find the initial equilibrium:
– 200 − 5P = 50 + 3P → 150 = 8P → P0 = 18.75
– Q0 = 200 − 5(18.75) = 106.25
Now introduce a positive demand shock that adds 20 units of demand at every price:
– New demand: Qd’ = 220 − 5P
Find the new equilibrium:
– 220 − 5P = 50 + 3P → 170 = 8P → P1 = 21.25
– Q1 = 220 − 5(21.25) = 113.75
Interpretation:
– Price rises from 18.75 to 21.25 (≈13.3% increase).
– Quantity rises from 106.25 to 113.75 (≈7.0% increase).
– Result: a positive demand shock increased both price and