How do external shocks typically affect aggregate supply?

External shocks, such as natural disasters, geopolitical events, or sudden changes in commodity prices, can significantly impact the economy's overall capacity to produce goods and services. These shocks can affect the factors of production, such as labor supply, raw materials, and technological capabilities, leading to changes in overall production efficiency.

When an external shock occurs, it can lead to an immediate shift in the aggregate supply curve. For instance, a natural disaster can destroy infrastructure, leading to decreased production capabilities. Similarly, a sudden increase in oil prices can raise costs for many industries, prompting a leftward shift in the aggregate supply curve as the overall production becomes more expensive and less efficient. The shift indicates a change in the economy's ability to supply goods at various price levels.

Understanding this dynamic is crucial for analyzing economic conditions, as it highlights how vulnerabilities in the economy can lead to broader implications for output and inflation.