Should businesses cut prices to attract customers and help end a recession?Some Industries are slowing down price hikes. It's great for the the consumers but economists believe that price drops...

Should businesses cut prices to attract customers and help end a recession?

Some Industries are slowing down price hikes. It's great for the the consumers but economists believe that price drops could actually make the ecomony weaker.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I think what you are really asking is whether price cuts will help get economies out of recessions, not whether it is good for an individual business to cut prices.  I have changed your question to reflect this.

If businesses cut prices, it could stimulate an increase in spending on the part of consumers.  Consumers might take the opportunity to start buying again.  If they spend enough to make aggregate demand go up again, then it is a good thing.

However, this depends on the level of confidence that consumers have in the economy.  If consumer confidence is low, dropping prices will not help.  Instead, it may actually hurt if consumers see it as a sign that businesses are getting desperate.  If consumers feel this, they may fear that aggregate demand is going down and that their own jobs will be in danger.  If this happens, then aggregate demand will go down as consumers spend less and the economy will be in more trouble than before.

So, the impact that lowering prices has will depend largely on the mood of consumers and how the consumers perceive the price cuts.

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