Supply shock

In the short run, an economy-wide negative supply shock will shift the aggregate supply curve leftward, decreasing the output and increasing the price level.

[1] For example, the imposition of an embargo on trade in oil would cause an adverse supply shock, since oil is a key factor of production for a wide variety of goods.

A supply shock can cause stagflation due to a combination of rising prices and falling output.

The 1973 Oil Crisis is often used as the exemplar case of a supply shock, when OPEC restrictions on production and sale of petroleum resulted in fuel shortages throughout the developed world.

In the short run, an economy-wide positive supply shock will shift the aggregate supply curve rightward, increasing output and decreasing the price level.

Negative supply shock. The initial position is at point A, producing output quantity Y 1 at price level P 1 . When there is a supply shock, this has an adverse effect on aggregate supply: the supply curve shifts left (from AS 1 to AS 2 ), while the demand curve stays in the same position. The intersection of the supply and demand curves has now moved and the equilibrium is now point B; quantity has been reduced to Y 2 , while the price level has been increased to P 2 .