Two bad days can look identical on the bottom line. On one, the skiers stayed home. On the other, they came, but the groomers cost a fortune to fuel. Same loss, opposite cause.
Learning objectives. After this week you can (1) define aggregate supply in the short and long run; (2) tell a supply shock from a demand shock by its fingerprint; and (3) find on your report which line a shock hit.
Remember this: a demand shock shows up first in your visits. A supply shock shows up first in your costs.
1) The other side of the economy
Aggregate supply (AS) is the total output firms are willing and able to produce at each price level. In the short run some costs are sticky (wages, leases, contracts), so when prices rise faster than costs, firms produce more: short-run AS slopes upward. In the long run all prices and costs adjust, and output returns to potential, set by labor, capital and technology. Long-run AS is vertical at potential output.
2) Two kinds of shock, two fingerprints
- A demand shock moves total spending. Output and price pressure move in the same direction: a confidence slump lowers both.
- A supply shock moves costs or capacity. Output and prices move in opposite directions: a fuel spike pushes prices up while output falls.
Falling output with rising prices is stagflation. It is the hard case for policy: stimulating demand feeds the inflation, and fighting the inflation deepens the downturn. And once a supply shock fades, the price level usually stays higher than before; it is the inflation rate that calms down.
3) Where each shock lands on your report
Demand signals on your Macro environment line (confidence, unemployment, the competitor's ticket) show up in your Skier visits. Cost signals (the Fuel and Inflation indices) show up in your Expenses: the report says your costs are inflation- and fuel-adjusted, and your decision form marks grooming and plowing as fuel-sensitive.
Percent Change in a Cost = (New Index − Old Index) ÷ Old Index × 100
Fuel goes from 1.00 to 1.50: a bill that tracks fuel rises 50%, so $2,000 becomes $3,000. Nothing about your mountain changed. If a budget's balance can't cover the higher need, the shock shows up instead as a lower coverage percentage on the Operations line. In the short run you can re-price and re-budget around a shock like that; you cannot change how much fuel a groomer burns overnight.
4) Reading a mixed week
| What the report shows | Shock type | Fingerprint |
|---|---|---|
| Fuel 1.00 → 1.50 | Negative supply | Expenses jump or coverage drops; visits barely move at first |
| Confidence 64 → 48 | Negative demand | Visits fall at the same prices; costs steady |
| Confidence 48 → 62 | Positive demand | Visits rise at the same prices; costs steady |
Quick self-check
(a) A fuel spike: supply or demand shock? (b) Output falls while prices rise. What is that called? (c) Visits held steady but expenses jumped. Which side was hit? (Answers: supply; stagflation; the supply, or cost, side.)
Common mistakes
- Calling every bad day a demand problem. If visits held but profit fell, look at costs.
- Expecting prices to fall back after a supply shock. The level usually stays up.
- Thinking stagflation has an easy fix. Each remedy worsens the other problem.
This week in the arena
Find your worst day this week and put it next to a normal one. Did visits fall, or did expenses rise? Check the Fuel, Inflation and confidence readings on both days, and name the shock.