Technical Analysis
The diagram to the right demonstrates a negative supply shock; The initial position is at point A, producing Y1 quantity, at P1 prices. Then there is a supply shock, this has an adverse effect on aggregate supply, the supply curve shifts left (from AS1 to AS2), while the demand curve stays in the same position. The intersection of the supply and demand curves has now moved and the equilibrium is now point B, quantity has been reduced to Y2, while prices have been increased to P2.
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