In economics, a demand shock refers to a sudden and unexpected change in the demand for goods and services in an economy. When discussing the impact of a demand shock, it's important to consider the time frame involved, specifically the short run vs. the long run.
In the very short run (or the immediate run), prices are often considered inflexible or "sticky." This means that they do not adjust quickly in response to changes in demand. For example, if there is an unexpected increase in demand for a product, firms may not immediately raise prices due to contracts, menu costs, or other frictions. As a result, they might respond to higher demand by increasing production rather than raising prices.
However, over the longer run, prices tend to become more flexible. Firms adjust their prices based on market conditions, changes in demand, and competition. In the long run, if a demand shock persists, and firms experience sustained higher demand, they are likely to adjust their prices upward to reflect that new equilibrium. Conversely, if demand decreases significantly, prices may eventually fall as firms seek to stimulate sales.
In summary, while prices can be inflexible in the very short run due to various frictions, they generally become more flexible in the long run as the economy adjusts to new conditions.