Economies generally keep cycling through periods of booms and busts (described below). This is due to heuristic way in which demand and supply are balanced.
Boom
To meet demand, industry in certain sectors grow - often on borrowed money, counting on future profits. Industries indeed produce profit for some time, but production keeps increasing until production exceeds demand.
During this time, the industries’ economic value - or at least their evaluation by the securities market- grows. Their operating cost increases because they invest more and hire more workers. Banks are more willing to lend at low interest rates.
Consumers, being able to find employment and loans, feel richer and more confident in their spending.
Note that a boom is different from a bubble - which is a valuation error, rather than a overproduction problem.
Bust
Aka recession.
Market causes and reactions
When production exceeds demand, some industries go bankrupt, defaulting on their loans. Prices of securities fall, because the market has by now learned that the demand for product(s) is lower than the supply.
Reaction of banks
If loans are too big, lender banks fail, or start hoarding capital in order to compensate for losses by becoming reluctant to make new loans.
Role of government
The government’s budget deficit has an impact on the interest rate on government debt, which inturn affects the rate of interest charged by banks in their lending.
Business response
Due to impeded entrepreneurship, GDP growth reduces drastically. Due to bankrupt industries, the economy may even shrink! Businesses which remain solvent respond by cutting costs (including laying of people), selling their goods and services for cheaper to attract consumers. Due to the cost cutting, companies may in fact make record profits!
Consumer behavior
Consumers feel poor due to falling prices and fears of unemployment, and don’t have confidence to spend.
Impact on prices
As consumers have less money to spend, prices may fall.
Because businesses do not expand their services, projected demand for oil actually falls. This leads to decreased price of oil and oil-related enterprises.
Recovery
To recover from a bust, consumer confidence must be restored, government should cut deficit, banks’ willingness to lend should increase, and businesses should feel confident to hire more people.
International Contagion
When a certain country is experiencing a recession, it can adversely affect others due to many reasons.
Countries whose businesses (especially banks) had lent to recession-hit businesses and governments experience greater risk. This triggers reduction in lending by banks.
Countries with otherwise healthy businesses which export goods to recession hit countries also face reduced profitability due to reduced demand and due to decrease in value of the recession-hit country’s currency.