It is easy to see how a recession fuels a downward spiral: demand falls, expenditure is cut, income falls, demand falls (again), etc.
Ordinarily we'd think of a downward sloping demand curve.
The problem is that as the market continues to spiral downward, the demand for this unit has fallen as well.
Both the quantity, L, and quality, q, of labor are factors of production for a plant.12 Plants can be price-takers in the output market, or local monopolies which set prices given their downward sloping demand.
So, here's a picture of the labor market in Texas, or any region: Wait – where does that downward-sloping demand curve come from?
In a world of downward-sloping demand curves, if you want less of something, the answer is to raise the cost of whatever that thing is.
Think of it as choosing a point on a downward-sloping demand curve for monetary base, the sum of bank reserves and currency in circulation.
There's a downward-sloping demand for money – the higher the interest rate, the more people will skimp on liquidity in favor of higher returns.
And yet, while many might deny it, an increase in the supply of low-skill labour leads – so long as there are normal downward-sloping demand curves – to lower equilibrium wages.
Most of the theoretical studies on balance billing assume a monopolistic physician who faces a downward-sloping demand curve [2]-[4].
