Demand shock
Encyclopedia
In economics
, a demand shock is a sudden event that increases or decreases demand
for goods or services temporarily. A positive demand shock increases demand and a negative demand shock decreases demand. Price
s of goods and services are affected in both cases. When demand for a good or service increases, its price typically increases because of a shift in the demand curve
to the right. When demand decreases, its price typically decreases because of a shift in the demand curve to the left. Demand shocks can originate from changes in things such as tax rates, money supply
, and government spending
. For example, taxpayers owe the government less money
after a tax cut, thereby freeing up more money available for personal spending. When the taxpayers use the money to purchase goods and services, their prices go up.
In the midst of a poor economic situation in the United Kingdom
in November 2002, the Bank of England
's deputy governor
, Mervyn King
, warned that the domestic economy was sufficiently imbalanced that it ran the risk of causing a "large negative demand shock" in the near future. At the London School of Economics
, he elaborated by saying, "Beneath the surface of overall stability in the UK economy lies a remarkable imbalance between a buoyant consumer and housing sector, on the one hand, and weak external demand on the other."
During the global financial crisis of 2008, a negative demand shock in the United States economy was caused by several factors that included falling house prices, the subprime mortgage crisis
, and lost household wealth, which led to a drop in consumer spending. To counter this negative demand shock, the Federal Reserve System
lowered interest rate
s. Before the crisis occurred, the world's economy experienced a positive global supply shock
. Immediately afterward, however, a positive global demand shock led to global overheating and rising inflationary pressures.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, a demand shock is a sudden event that increases or decreases demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
for goods or services temporarily. A positive demand shock increases demand and a negative demand shock decreases demand. Price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
s of goods and services are affected in both cases. When demand for a good or service increases, its price typically increases because of a shift in the demand curve
Demand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...
to the right. When demand decreases, its price typically decreases because of a shift in the demand curve to the left. Demand shocks can originate from changes in things such as tax rates, money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
, and government spending
Government spending
Government spending includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final...
. For example, taxpayers owe the government less money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
after a tax cut, thereby freeing up more money available for personal spending. When the taxpayers use the money to purchase goods and services, their prices go up.
In the midst of a poor economic situation in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
in November 2002, the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
's deputy governor
Deputy Governor
A Deputy governor is a gubernatorial official who is subordinated to a governor, rather like a Lieutenant governor.-British colonial cases:In the British empire, there were such colonial offices in :...
, Mervyn King
Mervyn King (economist)
An ex-officio member of the Bank's interest-rate setting Monetary Policy Committee since its inception in 1997, Sir Mervyn is the only person to have taken part in every one of its monthly meetings to date. His voting style is often seen as "hawkish", a perspective that emphasises the dangers of...
, warned that the domestic economy was sufficiently imbalanced that it ran the risk of causing a "large negative demand shock" in the near future. At the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
, he elaborated by saying, "Beneath the surface of overall stability in the UK economy lies a remarkable imbalance between a buoyant consumer and housing sector, on the one hand, and weak external demand on the other."
During the global financial crisis of 2008, a negative demand shock in the United States economy was caused by several factors that included falling house prices, the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
, and lost household wealth, which led to a drop in consumer spending. To counter this negative demand shock, the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
lowered interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s. Before the crisis occurred, the world's economy experienced a positive global supply shock
Supply shock
A supply shock is an event that suddenly changes the price of a commodity or service. It may be caused by a sudden increase or decrease in the supply of a particular good. This sudden change affects the equilibrium price....
. Immediately afterward, however, a positive global demand shock led to global overheating and rising inflationary pressures.