What Happens to a Demand Curve During a Recession?

A demand curve tracks the relationship between the price of a product or service and how much of that product or service consumers want to buy. The curve reflects only how consumers respond to changes in price. Recessions affect demand for your small business's products or services, too, sometimes by actually increasing it. When that happens, the demand curve itself "moves" to a different location.

The demand curve is a simple model of consumer behavior, telling you how much of a product or service you can expect to sell at any given price point. The curve is plotted onto a graph. The vertical axis of the graph is the price of the product or service you're selling. The horizontal axis is demand for your product or service from customers. The typical demand curve slopes downward from the upper left (signifying high price and low demand) to the lower right (low price, high demand).

One thing any business owner must understand about the demand curve is that it assumes the price is the only important thing changing. All other factors that could influence consumers' buying decisions are assumed to remain constant. Under this assumption, just changing the price is enough to increase or decrease demand. In economics, this is called "moving along the curve." The curve itself doesn't change; customer demand just moves to a new point on the curve.

When important factors in consumer behavior other than price change, then the curve itself moves, or shifts, to a different position on the graph. These external events can include changes in consumer tastes, competitors' actions, news coverage or macroeconomic factors such as a recession. The direction of the shift depends on whether the external event acts to increase demand for the product or decreases it. If it increases demand, then the curve shifts to the right, meaning that there is more demand at the current price (or any price) than shown on the original curve. Similarly, if an external event decreases demand, the curve shifts to the left, reflecting less demand at any given price.

With this in mind, the question becomes whether a recession decreases or increases demand. With most products -- called "normal goods" -- a recession will decrease demand. Recessions, or periods of economic contraction, reduce income, and when people have less money in their pockets, they buy less. For normal goods, a recession shifts the demand curve to the left. But some products actually see an increase in demand during a recession, because people substitute them for more expensive products. They buy more of this item specifically because they have less money in their pockets. (Ramen noodles might be an example.) Economists refer to such things as "inferior goods." For inferior goods, a recession shifts the demand curve to the right.