Defining a demand shock
A demand shock is a sudden increase or decrease in the demand for a product or service. And usually, it does not last for a long time. It depends on the country or region’s macro or microeconomic influence if the demand shock is positive or negative.
Positive vs. negative demand shock
A positive shock’s effect makes consumer demand rise more than the standard. Anything that can contribute to a spike in customer sales, like a sudden, unpredictable heavy rainfall, can cause a rise in the sales of umbrellas or raincoats. A few more examples that can cause a positive shock include new technology, lesser tax, or interest.
On the other hand, a negative shock’s effect is the exact opposite of a positive shock wherein there is a massive decline in consumer demand. For example, a customer finds a fly in his food while dining in a restaurant. He decided to post it online, where thousands of people shared and reacted to the post. This post will now cause a considerable decrease in the restaurant’s sales. Some more examples that can cause negative shock includes negative reviews, natural calamities such as earthquakes and typhoons, recessions, stock market crashes, etc.
The effects on pricing
Let’s take the sudden rainfall incident as an example. Some vendors use this opportunity to put a price hike in their umbrella products. Since it’s an unpredicted heavy rainfall, most people naturally won’t bring their umbrellas. The situation leaves them forced to buy, or else they have to wait out until the rain subsides, or else they’ll get wet.
Next is the restaurant situation. Until the restaurant owner solves the fly issue, there will be fewer and fewer customer visits. The owner may consider lowering the pricing of offers.
The laws of supply and demand
For example, a country expects an enormous typhoon. People will go to the groceries to buy essential supplies like water and instant or canned food. This will cause a demand shock and price hike. In contrast, if the supply is the same, but the demand declines, the price also decreases.
In short, a positive demand shock makes people willing to avail of a product or a service, albeit at a higher price. The supply will slowly catch up with the demand with an increased price.
The COVID-19 pandemic as a demand shock
The effect of the COVID-19 pandemic is a combination of both positive and negative.
Due to lockdowns and restrictions globally, businesses such as transportation, hospitality, and the travel industry greatly suffered. Many companies stopped operating. A lot of people lost their jobs since firms are trying to cut costs or else they will go bankrupt.
However, other businesses soared due to the pandemic, like the medical field. Some manufacturers and suppliers of products like tissue, alcohol, face masks, face shields, and the like raised their pricing since the demand is high. There was a time when there was already an increased supply; it still was not enough.