Supply Shock

3 Key excerpts on "Supply Shock"

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  eBook - ePub

  Supply Chain Risk Management

  How to Design and Manage Resilient Supply Chains

  • John Manners-Bell(Author)
  • 2023(Publication Date)
  • Kogan Page

    (Publisher)

  15

  Economic risks to the supply chain

  OBJECTIVES This chapter will familiarize the reader with:

  • the impact of ‘demand shocks’ on supply chains, with reference to specific case studies
  • how currency fluctuations can be particularly disruptive to cross-border commerce
  • various ‘Supply Shocks’, such as shipping rate and oil price volatility
  • the role that trade restrictions and trade ‘wars’ can play in disrupting the international movement of goods
  • how industrial unrest in the labour-intensive transport and logistics market is a growing risk, not least in sectors affected by the growth of e-commerce

  A supply chain and transport risk survey undertaken by the World Economic Forum and consultancy company Accenture (WEF, 2013a) identified that, in terms of perceived threat, economic events are more significant to company executives than many other risks, including corruption, piracy or pandemics. The economic risks identified included:

  • demand shocks
  • currency fluctuations
  • Supply Shocks
  • oil price volatility
  • trade restrictions
  • industrial unrest
  • shortage of labour

  These are dealt with in more detail below.

  Demand shocks

  Demand shocks – the surge or collapse in demand for products and services – are a significant risk for supply chains due to the difficulty of forecasting their onset and the impact (positive or negative) on production and supply. The ‘Great Recession’ of 2008 was the most severe negative demand shock of recent years, born out of the United States’ subprime mortgage crisis, falling house prices and a collapse in consumer confidence. Arguably just as disruptive was the 2022 surge in demand for consumer goods prompted by government Covid economic stimulus packages, quantitative easing and a low interest rate environment. This caused a massive capacity crunch in the shipping, ports and related transportation industry, most evident at the West Coast ports of the USA (see below).

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  eBook - PDF

  Macroeconomics for Business

  The Manager's Way of Understanding the Global Economy

  • Lawrence S. Davidson, Andreas Hauskrecht, Jürgen von Hagen(Authors)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  For example, an oil price hike caused by military conflicts in the Middle East would be an oil price shock. In contrast, an oil price hike caused by an increase in firms’ demand for oil following an increase in aggregate demand would not be considered to be a shock. 3.3.1 Short-Run Supply Shocks Consider a sudden increase in crude oil prices as an example of an oil price shock: • Above we argued that this should cause a reduction in aggregate supply – that is, the increase in business costs would lead to lower employment and output at the initial price level. In Figure 3.4, the AS curve shifts to the left as indicated by the blue arrow and the curve labeled AS’. At the initial price level P 0 , aggregate supply is now less than aggregate demand. Find the level of output firms would produce at the initial price level, P 0 . • As firms begin to reduce output, the markets for goods and services are disrupted. • This aggregate shortage leads to pressure for the price level to rise. • A rise in the price level reduces aggregate demand toward the lower level of aggregate supply. At the same time, the rise in the price level makes firms willing to produce more than at the price level P 0 . We move along the AD curve until the 102 Aggregate Supply and Short-Run Equilibrium new intersection with the AS curve is reached. This is indicated by the light- blue arrow. • The result is a new macroeconomic equilibrium indicated by the light-blue dot. It comes with a higher price level, P 1 , and a lower real GDP, Y 1 . Next, consider a reduction in the cost of labor due to a cut in payroll taxes: • The tax cut is tantamount to a reduction in marginal cost and leads to an increase in employment and output. In Figure 3.5, the AS curve shifts to the right as indicated by the blue arrow and the line labeled AS’. • At the initial price level P 0 , aggregate supply becomes larger than aggregate demand. • This excess of supply over demand leads to a decreasing price level.

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  eBook - PDF

  Principles of Economics 3e

  • Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  It might be an event that affects supply, like a change in natural conditions, input prices, or technology, or government policies that affect production. How does this economic event affect equilibrium price and quantity? We will analyze this question using a four-step process. Step 1. Draw a demand and supply model before the economic change took place. To establish the model requires four standard pieces of information: The law of demand, which tells us the slope of the demand curve is negative; the law of supply, which tells us that the slope of the supply curve is positive; the shift variables for demand; and the shift variables for supply. From this model, find the initial equilibrium values for price and quantity. Step 2. Decide whether the economic change you are analyzing affects demand or supply. In other words, does the event refer to something in the list of demand factors or supply factors? Step 3. Decide whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or producers want to sell? Step 4. Identify the new equilibrium and then compare the original equilibrium price and quantity to the new equilibrium price and quantity. 64 3 • Demand and Supply Access for free at openstax.org Let’s consider one example that involves a shift in supply and one that involves a shift in demand. Then we will consider an example where both supply and demand shift. Good Weather for Salmon Fishing Suppose that during the summer of 2015, weather conditions were excellent for commercial salmon fishing off the California coast. Heavy rains meant higher than normal levels of water in the rivers, which helps the salmon to breed.

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