Why do sudden shocks to demand or supply disrupt equilibrium?

Sudden shocks to demand or supply disrupt equilibrium because they cause immediate and unexpected changes in market conditions.

In economics, equilibrium is the state where the quantity of goods or services supplied equals the quantity demanded at a particular price level. This balance is achieved when the forces of supply and demand are in harmony. However, sudden shocks to either demand or supply can disrupt this balance, leading to either a surplus or a shortage in the market.

A shock to demand occurs when there is an unexpected change in the factors affecting demand, such as consumer preferences, income, or the price of related goods. For example, if there is a sudden increase in consumer income, this could lead to an increase in demand for certain goods or services. If suppliers are unable to adjust their production levels quickly enough to meet this increased demand, a shortage may occur, disrupting the equilibrium. Conversely, a sudden decrease in demand, perhaps due to a change in consumer preferences, could lead to a surplus if suppliers are unable to reduce their production levels in time.

Similarly, a shock to supply occurs when there is an unexpected change in the factors affecting supply, such as production costs, technology, or the availability of resources. For instance, a sudden increase in the cost of raw materials could lead to a decrease in supply as producers are unable or unwilling to produce as much at the same price. If demand remains constant, this could lead to a shortage, disrupting the equilibrium. On the other hand, a sudden increase in supply, perhaps due to a technological advancement, could lead to a surplus if demand remains constant.

In both cases, the market will eventually adjust to these shocks and a new equilibrium will be established. However, this adjustment process can take time and may involve significant changes in price levels, production levels, and consumption patterns. Therefore, sudden shocks to demand or supply can cause significant disruption to the equilibrium in the short term.