Why don’t price decline during recession?

What is recession?

According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales". More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.

In simple words, Recession is not what you want. Typically the nation's economy has to be doing poorly for at least six months before the officials start talking about a recession. There has to be a trend. There are many reasons a recession could start. Something might happen with the stock market or in the business world that scares consumers, which we all are in some way or another. Something that makes people hangs on to their money instead of spending it.
Reduced spending by the consumer means companies have to reduce their output. If this happens for long enough it will mean a reduction of jobs. When people become unemployed, they typically stop spending. The more jobs are lost, the less the consumers consume. The fewer consumers consume, the more jobs are lost. It turns into a vicious cycle.

Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt.

In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.

Why don’t price decline during recession?

Let us assume there are three kinds of goods superior, normal and inferior firstly, I consider superior goods. Superior goods are also known as luxury items which are status symbol for consumer rather than necessities. The targeting consumer section of superior goods is upper class consumer which is highly affected by recession but the purchasing power of this section is remaining constant to some extent because of their high paid salary. Considering the purchasing power of consumer companies would not change their price.

Secondly, we consider normal goods which are the necessities of consumers. The targeted consumer section is middle class consumer. It is also the most affected section of consumers by recession. To meet the daily requirements of life consumer has to spend particular amount of money on these goods. Consumer can decrease the demand for such products but cannot avoid it totally considering this fact companies doesn’t decline their prices.

Thirdly the inferior goods which are low in quality the target consumer section of such goods are lower income consumers. Knowing the fact that by hook or by crook consumer has spent his hard earned money to meet the day to day requirement of lives such as food cloth etc company does not decrease their prices.

References:

http://en.wikipedia.org/wiki/Recession
http://getanswers.co.in/what-is-recession
http://econ.economicshelp.org/2008/09/definition-of-recession.html
http://jennifer.hubpages.com/hub/What-Is-A-Recession-and-How-Will-It-Effect-You


Submitted to: Mr. Gurdeepak singh
Submitted by: Saumya Rastogi
Class: MBA Ist B