Question

(i) In a competitive market, what are the impacts on price, quantity, and the

outcomes for producers and consumers, of a shock to marginal cost that hits

one sector of suppliers? (Alternatively: consider a shock to the demand side,

or the imposition of a tax or subsidy.) How do these impacts depend upon the

size of the affected sector, and the properties of supply and demand?

(ii) Describe a real situation in which a sector of supply or demand was or will

be hit by a change to costs, to benefits, or to taxes and subsidies. Using your

analysis from (i), evaluate the consequences for the market’s participants.

Answer 1

Supply Shock: supply shock is a type of shock that occurs when there is any sudden change in the supply of services or commodity.

Demand Shock: demand shock happens when there is any sudden change in the demand of goods and services due to any event. The demand will increase, if there will be any positive shock, however the demand will decrease if there is any negative shock.

One of the example of demand shock can be occurring of natural disaster as it may lead to increase or decrease in the demand which will affect the prices for sure.

Example of positive demand shock can be decrease in taxes, providing subsidies, lowering of interest rate, which will lead to increase in demand.

ii the real life example of supply and demand shock can be the increase in demand of electrical cars and the example of supply shock can be the supply shock occurred in 1970 in the oil market of United States leading to low supply and increase in prices.

The recent financial crisis in US is another example of demand and supply shock.

The supply and demand shock will automatically lead to the increase or decrease in prices due to which the income, profit, consumption, investment, output will get affected. Each of the market participant will be affected in different ways. For example if there is any disaster that occurred, in such case the prices will be high, demand will be increased or decreased which will affect each market participant in different manner.