A principle purpose of the market model is to show how equilibrium price and quantity will change as a result of some 'exogenous shock'--for instance, an increase in demand causes equilibrium price and quantity to increase. Can you think of a real-world example of such a shock to which you could apply the market model to explain changes in price and quantity?

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6 January, 09:21

A principle purpose of the market model is to show how equilibrium price and quantity will change as a result of some 'exogenous shock'--for instance, an increase in demand causes equilibrium price and quantity to increase. Can you think of a real-world example of such a shock to which you could apply the market model to explain changes in price and quantity?

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Warren Gill · Answer 1

A classic example of exogenous shock is the oil supply shock in the 1970s.

Explanation:

At that time, the OPEC (Organization of Petroleum Exporting Countries), led by Arab countries, controlled the supply of oil in retaliation for Western policies. Controlling supply, ie decreasing production, drastically raised the price of a barrel of oil. Thus, both the quantity of equilibrium and the price and equilibrium changed in that situation due to the exogenous shock in the supply of the product.