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Lesson 22: Demand and Supply Shocks Across the Supply Chain

Module 1: Macro Fundamental Analysis

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Video Transcript

so in the final tab on the inflation spreadsheet inflation and supply chain we’re going to be looking at the supply chain and also inflation how it relates to the supply chain now the supply chain is very important to understand because this is where you will find opportunities to make money in the financial markets on a fundamental basis and if we start over here on the left you can see we have raw materials raw materials this could be miners supply to the manufacturers manufacturers supply to the distributor the distributor supplies to the retailer the retailer supplies to the consumer so from left to right we have supply along the chain from the miners to the consumers and this is representative of our aggregate supply curves when we see shifts in the aggregate supply curves we’re talking about output in this part of the supply chain now if we go from right to left you can see the consumer will demand from the retailer goods and services the retailer demands goods and services from the distributor the distributor demands goods and services from the manufacturer and the manufacturer will demand goods and services from the providers of raw materials so the miners you can think of this now on the outside of the supply chain itself you have global events which can affect from the left the supply side of the chain and this is known as a supply shock or you could have a global event which affects the demand side of the chain and this is known as a demand shock we can also see that when we look at inflation coming from the supply side this is where we get cost push inflation so if commodity prices were to rise the input prices for manufacturers or distributors or retailers were to rise this will be passed along the chain because as the price of commodities or raw materials goes up the manufacturer who pays a higher price passes these costs on to the distributor these costs then get passed on to the retailer and the retailer passes them on to the consumer and this is what causes cost push inflation this is what causes prices to rise from the supply side conversely we can see demand pull inflation comes from the right so it’s that shifting of aggregate demand as opposed to short-run aggregate supply so if for example aggregate demand shifts to the right and we have an increase in demand for whatever reason the consumer is suddenly more bullish they want to go out and consume more and perhaps they’ve had a reduction in income tax and demand from the consumer to the retailer increases prices get bid up there is more competition for the resources in the economy because there is more demand for them and the value of those resources goes up in price as they become more scarce so demand from the consumer to the retailer also is reflected in high demand from the retailer to the distributor the distributor then demands more from the manufacturer and the manufacturer demands more from the supplies of the raw materials and as demand increases along the chain from right to left prices as i say are bid up and this creates the demand pull inflation we see with a shift to the right in aggregate demand and of course the reverse would be true if for whatever reason the consumer became less bullish more pessimistic and demand from consumer to the retailer decreased instead of increasing we wouldn’t see demand for inflation we would see that demand side deflation and if over on the supply side commodity prices were to decrease and as a result manufacturers were making more profits distributors were making more profits retailers were making more profits we would start to see that supply side deflation conditions for that goldilocks economy taking place so it’s important to understand the supply chain and how global events so demand shocks from the right or supply shocks from the left can affect the supply chain because ripples along the supply chain from one side to another are what provide trading opportunities on a fundamental basis just as an example if there was a decrease in the supply of oil this would provide an opportunity for commodity traders to trade the appreciation in the value of oil so a long bias because of a reduction in supply as the value of oil increases because of a reduction in supply this could feed into the profit margins of companies which specifically operate in the oil industry or provide services or equipment to the oil industry you could see an increase in their profit margins as the price of oil increases this could be a long bias on those specific companies in the stock market and an increase in the oil price would feed into the nx input of oil-producing nations such as russia such as canada such as norway and currency traders could take advantage of that with a long bias on oil producing nations so that’s just a very short example of ways in which shocks to the supply chain can lead to knock-on effects which provide great trading opportunities for the time being we are just looking at inflation and how it moves up and down the supply chain we will be looking more in depth at supply chains in a later module and going through examples of shocks to the supply chain and trading opportunities which may arise because of those shocks