Could anyone explain why firms reduce both price and supply of goods and services during a recession with a practical real life example for better understanding ?


1 Answer 1


Why do firms reduce both price and supply during a recession?

From a purely theoretical standpoint, it is not that firms (suppliers) reduce price. Instead, they reduce supply, which is visualized as the supply curve shifting to the left, which in turn might intersect the demand curve at a different equilibrium price.

In a recession the demand contracts. If/when the contraction of demand outweighs a contraction of supply, the result is a lower equilibrium price. A reduction of supply tends to preclude the steeper decrease of price that would occur if only the demand contracted.


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