How Recessions Work

Supply and Demand

The supply curve and the demand curve -- where they meet determines the price of a particular item or service.
© Photographer: Jason Yoder Agency:

The ultimate goal of producers is to make money -- to bring in more money than they spent producing the product. Consumers may want to satisfy their wants and needs by buying products, or they may buy products in order to make money (by reselling the products or by using the products to produce other products). In any case, consumers generally want to pay as little for goods and services as they can.­­

In a market, the actions of producers and consumers determine the value of goods and services. Producers are the ones who actually set prices, but they do so based on the behavior of consumers. If nobody buys a product at a particular price, the producer knows the price is too high. If some consumers buy it, but not enough to buy everything produced, producers must either decrease the price or decrease the supply. The willingness of consumers to pay for products is known as demand. Even if there is constant high demand for a product (toilet paper, for example), individual producers need to keep the price down or consumers will just buy it from a competitor.


In the next couple of sections, we'll see how all these factors work in a growing economy and in a contracting economy.