Demand is key not supply.
Wages and prices can be slow to adjust to change.
Keynes explained why recessions occur and put forward a set of measures to keep an economy on an even keel. Earlier economists thought the market would balance the ups and downs of business cycles and the market should be left alone to work through what Adam Smith called the invisible hand. Keynes disagreed with this and argued that recessions can turn into depressions and become permanent.
Two foundation stones of Keynesian theory.
1. Aggregate demand (AgD) might not be enough to allow firms to employ people resulting in layoffs and high levels of unemployment.
Aggregate demand is the total demand for products and services in an economy including consumers, business and government.
2. The macroeconomy (the whole economy) adjusts slowly to the reduction in demand because wages and prices are 'sticky'. Demand falls but wages and prices tend to stay the same and this fuels even more job losses and makes a recession worse.
These two factors can set a downward spiral in motion.
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