If the price level is lower, production is less attractive to firms. The price the firm receives is lower but their production costs do not go down because of the agreements that were made. Firms reduce the quantity supplied and the economy s output is below its potential. Because of reduced production, some laborers are laid off. The ones that keep their jobs usually work fewer hours.
Machines go unused or sit idle.
Sometimes entire plants shut down. When equilibrium output in the short run exceeds that economy s potential it is called expansionary gap. The larger the short run output exceeds the economy s potential, the larger the expansionary gap and the greater the upward pressure on the price level. When output in the short run falls short of the economy s potential output, it is called a contractionary gap. Supply Shocks Supply shocks are unexpected events that affect aggregate supply of output in the economy but usually only temporarily.