Demand Shock
What Is a Demand Shock?
A demand shock is a sudden unforeseen event that emphatically increases or diminishes demand for a product or service, generally for a brief time. A positive demand shock is a sudden increase in demand, while a negative demand shock is a lessening in demand. Either shock will affect the prices of the product or service.
A demand shock might be stood out from a supply shock, which is a sudden change in the supply of a product or service that causes a detectable economic effect.
Supply and demand shocks are instances of economic shocks.
Understanding a Demand Shock
A demand shock is a large however temporary disruption of the market price for a product or service, brought about by a startling event that changes the discernment and demand.
A seismic tremor, a psychological militant event, a mechanical advance, and a government stimulus program can all cause a demand shock. So could a negative survey, a product at any point recall, or an amazing news event.
Supply and Demand
At the point when the demand for a decent or service quickly increases, its price normally increases since providers can't cope with the increased demand. In economic terms, this outcomes in a shift in the demand curve to the right. A sudden drop in demand makes the inverse occur. The supply in place is too great for the demand.
Other demand shocks can emerge out of the anticipation of a natural disaster or climate event, like a run on filtered water, backup generators, or electric fans.
A positive demand shock can emerge out of fiscal policy, for example, an economic stimulus or tax cuts. Negative demand shocks can emerge out of [contractionary policy](/contractionary-policy, for example, tightening the money supply or decreasing government spending. Whether positive or negative, these might be viewed as conscious shocks to the system.
Instances of Demand Shocks
The rise of electric cars throughout the course of recent years is a genuine illustration of a demand shock. It was difficult to anticipate the demand for electric cars and, accordingly, for their part parts. Lithium batteries, for instance, had low demand as of late as the mid-2000s.
From 2010, the rise in the demand for electric cars from companies like Tesla Motors increased the overall market share of these cars to 3 percent, or about 2,100,000 vehicles. The demand for lithium batteries to power the cars additionally increased pointedly, and fairly suddenly.
The Lithium Shortage
Lithium is a limited natural resource that is hard to concentrate and found exclusively in certain parts of the world. Production has been not able to keep up with the growth in demand, thus the supply of recently mined lithium remains lower than it would be in any case. The outcome is a demand shock.
Over the period from 2016 to 2018, demand for lithium dramatically increased, expanding the average price per metric ton from $8,650 in 2016 to $17,000 in 2018. Over the course of the last decade, the increase in demand for electric cars from companies like Tesla Motors (TSLA) has increased the overall market share of these cars to over 4% of vehicle sales in 2022. The demand for lithium batteries to power the cars additionally increased pointedly, and fairly suddenly.
During this time, demand detonated for electric vehicles and furthermore battery-powered mobile telephones, workstations, and tablets.
From 2020 to 2022, the price of lithium has dramatically increased once more. This is on the grounds that the COVID-19 pandemic initially prompted a decline in demand that prompted the price of a metric ton of Li to fall to $8,000. Notwithstanding, as the economy recuperated, the price immediately spiked to $17,000 indeed toward the finish of 2021. The cost has been gone to the consumer, raising the cost of electric cars in a positive demand shock environment.
A Negative Demand Shock
The cathode beam tube is an illustration of a negative demand shock. The presentation of low-cost flat-screen TVs caused the demand for cathode-beam tube TVs and computer screens to drop to zero in a couple of short years almost. Not unexpectedly, the presentation of low-cost flat screens caused a once-normal service job, the TV repairman, to turn out to be for all intents and purposes wiped out.
Highlights
- A demand shock is a sharp, sudden change in the demand for a product or service.
- Demand shocks are generally short-lived, however can have longer-term outcomes.
- A positive demand shock will cause a shortage and drive the price higher, while a negative shock will lead to oversupply and a lower price.
FAQ
How Does a Demand Shock Differ From a Supply Shock?
A demand shock happens when there is an unforeseen change in demand, with the end goal that providers can't rapidly enough answer. A supply shock, then again, is when there is a startling change in supply (frequently a sudden reduction, despite the fact that supply shocks likewise exist when there is an excess).
Did Government Stimulus Checks Create a Demand Shock?
In the wake of the COVID-19 pandemic, the U.S. government issued a series of stimulus checks to American families. The goal was to assist families with adapting to lockdowns, business terminations, and different disruptions. Notwithstanding, these checks likewise may have been a positive demand shock, helping spending by too much as the economy recuperated and leading to high inflation.
What Can Cause a Demand Shock?
Demand shocks might be caused for at least one of several reasons. An economic recession might lead to high unemployment, where individuals can't spend as they had before. Natural or international disasters can likewise have a comparable effect in the short run. Demand shocks can likewise happen if an innovative advance makes a previous technology rapidly obsolete.
