The Effect of Depression and Recession on Supply and Demand of Products - Term Paper Example

?Running Head: RECESSION AND DEPRESSION This is a study that explores the concepts of recession and depression. It explains the definitions and the causes of recession and depression. In this study, factors such as inflation,tax rates,interest rates,increased debt and consumer perception of the economy have also been discussed. The study further gives examples of how individuals can take precautions to protect themselves in case of recession or depression.The effect of depression and recession on supply and demand of products is also explained in the study. Recession This is a term that is used in economics to mean a decline in economic activities. In times of recession, gross domestic product is negative and this is accompanied by a decrease in investment, and an increase in rates of unemployment (Schumpeter,1939). Recession normally occurs for a short period of time. Hansen (1941) noted that high rates of unemployment are witnessed during recession. His argument is that during this period, a large proportion of the population is unable to secure jobs. The reason behind this is a decline in profits made by firms and this hinders expansion thus fewer job opportunities. As a result, there are low living standards and individuals are faced with difficulties when it comes to catering for their basic needs. Poor standards of living are in most cases witnessed by those who depend on wages and salaries. Lack of employment cause insecurity and this discourages investors from risking their money by investing in any kind of a business. Due to the high rates of inflation during recession, there is reduction in investments. This is primarily because firms fear to set up investments because of the depreciating value of the currency. In the earlier stages of recession, there is a fall in productivity then productivity will increase as firms that are weaker close. Low investments by business firms mean a reduction in the amount of revenue from taxation of the businesses and individuals who could have been employed by investors. Government income will therefore reduce remarkably and there will be fewer funds to cater for the government expenditure. High interest rates during recession serve to discourage borrowing from banks. This will reduce the amount of money in circulation; inflation will therefore reduce. Recession causes a decline in the gross domestic product and this results to a decline in exports since the amount of goods being produced in the country is low. Recession erodes the confidence of consumers reducing the consumption rate. As a result, the recovery period will be lengthened. This occurs during severe recession periods. There are also increased individual and corporate debts. The prices of assets such as homes and financial assets also reduce significantly. There is an increase in the amount of government debts during recession. This is caused by a reduction in the amount of government revenue from taxation. Recession forces governments to borrow money from lending agencies such as the international monetary fund. The amounts of funds being generated from within the country are not sufficient to finance the activities of government institutions. Low productivity during the early stages of inflation will cause a reduction in the amount of products that are available for supply. This will lead to high demand for products and therefore prices will go up. Consumers will be forced to spend an extra amount of money to purchase goods. High prices may lead to inability to afford necessities. Business people will hoard goods causing scarcity of commodities in the market. In times of recession, there is high prevalence of inflation and as a result people will reduce the amount of money they spend on leisure and they will start saving more money than they are use to saving. People are forced to increase their budgets and spend more on commodities due to the high cost of living. The end of recession is marked by a decline in the rates of unemployment. At the end of this phase, less people are jobless and more people are able to secure jobs. Depression This is a phase when economic growth slows for a longer period of time. During depression there is a greater decrease in gross domestic product than in periods of recession. While recession occurs for a short period of time, depression will usually take place for quite a longer period (Shlaes, 2007). The rate of unemployment is much higher and lasts for a longer period than it is the case with recession. This situation is worsened by the frequent instances of retrenchment of employed people. The public in general faces a serious challenge as they struggle to make their ends meet. Countless numbers of weak business enterprises close down and this adds more to the category of unemployed persons. The high interest rates that are charged on borrowing during recession help to reduce the amount of money in circulation. This is the same case with depression although the interest rates are much higher; with borrowing being discouraged, inflation will eventually be moderated. Demand for commodities will therefore reduce because people have less money and the supply is also low. According to Friedman & Schwartz (1963), the situation of low amounts of revenue for the government will deteriorate because of the escalating levels of unemployment and the closing of weak businesses. Governments lend more funds from lending institutions and the debt burden increases. The rate of interest on funds that have been borrowed by the government will continue to increase. This is because the earlier debts have not been repaid and yet more money is being borrowed. Keynes (1936) argued that the amount of money which individuals wanted to save may exceed the amount that they wanted to invest. This means that individuals would consume less than was produced. H e further stated that since much of the income was used to pay taxes, it was possible for governments to address deficiency of demand by spending more money than that which they were getting from taxation. Consumers continue to experience economic hardships in providing for their necessities. In this situation, depression is very high and has continued for a considerably long period of time. Measures that can be taken during recession and depression There are several precautionary measures that can be undertaken to address the problems of recession and depression. These measures include the following: Encouraging self employment This will help to deal with the issue of retrenchment. Individuals should be encouraged to invest and become self employed as way of securing a means of having some personal income. Purchase of treasury bills and bonds According to White (1991), individuals should try to invest as much as they by purchasing of treasury bills and bonds. This form of investment will support them financially during the difficult economic times of depression and recession. Stocking in advance Business enterprises should purchase commodities during favorable economic times when is adequate availability. These goods will last them during the recessions and depression periods. Encouraging savings By saving enough money, people will have enough to use and they will avoid borrowing when the interest rates are very high. Effects of Recession and depression on demand and Supply Fox (2009) asserts that in the event of recession and depression there is high scarcity of commodities in the market that has a direct effect on supply. The reduction in supply results to the hiking of prices of commodities within a short period of time. As the law of demand and supply states “when the supply of a commodity is low, the demand for the commodity increases resulting to a subsequent increase in price. Monopolies will benefit as they have greater control on the prices of the commodities. Small businesses especially those that deal with daily supplies and do not have storage facilities like warehouses, will be adversely affected. The shift in supply will make the business to have fewer commodities for sale. This is the category of weak firms that will close down at the peak of recession. Due to inflation during recession, consumers have a lot of money to purchase commodities and this increases demand. The demand will surpass supply. This increase in demand will make the small businesses to run out of stock and they may not be able to replace it on time (Schumpeter, 1939). In conclusion, recession and depression are economic forces that can cause serious consequences to a country’s economy. The effects of recession and depression range from high rates of unemployment and inflation to a great effect on the supply and demand of commodities. There are precautionary measures that can be undertaken to address the issues of recession and depression in a country. References: Fox, J. (2009).  The Myth of the Rational Market.  Time Magazine.June. Friedman, M. & Schwartz, A. (1963). The monetary history of the United States, 1867 to 1960 Princeton: Princeton University Press. Hansen, A. (1941).  Fiscal policy and business cycles. New York: W. W. Norton & Co. Keynes, J.M. (1936). The General Theory of Employment, Interest, and Money. New York, NY: St. Martin's Press. Shlaes, A. (2007).   A new history of the Great Depression. New York: Harper Perennial. Schumpeter, J. (1939).  Business cycles. New York: Martino Publishers. White, L. (1991).   Public policy lessons for bank and thrift regulation.  New York: Oxford University Press. Read More