Why Do Recessions Occur

The most important job of macroeconomists is to try to prevent, or at least shorten, recessions, those moments in time during the production of goods and services diminish in the economy. Economists, politicians, and most people work to earn a living and we all absolutely hate recessions due to the considerable effect they have in terms of human suffering. This happens because when production diminishes, the companies then need fewer workers, which generally end up in massive lay offs, and a significant increase of unemployment. In bigger countries, millions of workers lose their jobs, as well as their capacity to support themselves and their families.

In this part of the site we will get into added supply and added demand to show how economists analyze recessions. Generally, recessions start with what economists call impacts, which are negative unexpected effects, such as natural disasters, terrorist attacks, harmful political and governmental policies, sudden increases in the cost of important natural resources etc.

The first thing to look into is if the prices of goods and services is that if the economy can be freely adjusted to the changes in the supply and demand caused by the impacts, the economy can recover very quickly. Unfortunately, however, the second thing to look into is that not all the prices in real life are completely free nor do they always adjust to the impact. To the contrary, some very important prices adjust very slowly and they are, as economists like to call them, rigid. As a result, recessions can prolong themselves and cause a lot of damage unless the government intervenes in order to help the economy recover quicker.