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    What's wrong with falling prices if it's due to supply side polices? I'm sure I'm missing a big piece of the puzzle but it should be a valid argument

    Consider it with the assumption that it's targeted so consumers know that prices have fallen but expect it to rise back to normal
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    (Original post by zayn008)
    What's wrong with falling prices if it's due to supply side polices? I'm sure I'm missing a big piece of the puzzle but it should be a valid argument
    I would assume that the knock-on effect it would have to producers would cause them great financial stress, leading to less production and a subsequent major spike in inflation.
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    (Original post by zayn008)
    What's wrong with falling prices if it's due to supply side polices? I'm sure I'm missing a big piece of the puzzle but it should be a valid argument
    Why should someone who worked hard for their assets lose their hard earned assets value where as people who held on to money profit. A huge part of the economy is consumer spending if I am not mistaken. If things are going down in value economy would also shrink as people wouldn't want to spend?
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    (Original post by jape)
    I would assume that the knock-on effect it would have to producers would cause them great financial stress, leading to less production and a subsequent major spike in inflation.
    That's only because of the uncertainty it causes like what if it was a controlled program?

    I'm just interested as to why it's a black topic, it's never considered and doesn't seem desirable even though it has quite a few benefits
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    (Original post by Emz99)
    Why should someone who worked hard for their assets lose their hard earned assets value where as people who held on to money profit. A huge part of the economy is consumer spending if I am not mistaken. If things are going down in value economy would also shrink as people wouldn't want to spend?
    The part about spending is true, but if it was an expected course of deflation that they knew wasn't permanent surely they'd go out and spend? Perhaps in the short run it could slow things down but in the long run you're looking at the value of money going up boosting all sorts markets. In terms of assets, it's not an extreme fall in value and assets like property are over valued anyway
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    I don't think anyone has ever argued against supply-side deflation. It happens all the time and it doesn't affect producers because their costs fall and consumer enjoy lower prices. Every piece of technology has technically undergone deflation.
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    (Original post by zayn008)
    What's wrong with falling prices if it's due to supply side polices? I'm sure I'm missing a big piece of the puzzle but it should be a valid argument
    It's basic a level mate. Year 12 stuff. Falling prices mean people begin to speculate and delay their purchases. For a short while it's fine because the advantages of whatever supply side policy will outweigh it. But in the long term it will lead to less consumption and less aggregate demand. It can also mean wage cuts too.

    That's a simple way of putting it.
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    (Original post by zayn008)
    The part about spending is true, but if it was an expected course of deflation that they knew wasn't permanent surely they'd go out and spend? Perhaps in the short run it could slow things down but in the long run you're looking at the value of money going up boosting all sorts markets. In terms of assets, it's not an extreme fall in value and assets like property are over valued anyway
    Nope they wouldn't go out and spend because people want the cheapest prices. When the price of something is decreasing it is in human nature to wait for the lowest price. Also how are they over-valued? I guess your talking about the wealth effect but they are not over-valued as it is based on market prices. You could argue most people are not going to sell their house so their property market isn't very liquid. However this is still good as it increases consumer spending. I wish I didn't mess around in economics lol as it is quite interesting.
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    (Original post by Wardog)
    It's basic a level mate. Year 12 stuff. Falling prices mean people begin to speculate and delay their purchases. For a short while it's fine because the advantages of whatever supply side policy will outweigh it. But in the long term it will lead to less consumption and less aggregate demand. It can also mean wage cuts too.

    That's a simple way of putting it.
    Right but economic theory isn't always practical, apparently PFI's are a good thing if we follow their theory. If there's unexpected deflation that's a fair arguement but what if it were a target? Consumers would know things aren't going to fall in price forever. I'd argue it's bad in the short run due to consumers waiting for prices to reach the lowest and firms looking to stay in the market but in the long run aggregate demand would actually increase to rebalance with Aggregate supply, the outcome? More output, more trading, more competition. So a period of deflation which would have little effect on wages could actually restimulate the economy. Whilst it might be basic AS, it's just a theory and economics doesn't always play into theory
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    (Original post by Emz99)
    Nope they wouldn't go out and spend because people want the cheapest prices. When the price of something is decreasing it is in human nature to wait for the lowest price. Also how are they over-valued? I guess your talking about the wealth effect but they are not over-valued as it is based on market prices. You could argue most people are not going to sell their house so their property market isn't very liquid. However this is still good as it increases consumer spending. I wish I didn't mess around in economics lol as it is quite interesting.
    Not necessarily, I'm not going to delay buying my milk because it'll be a little cheaper. However once it hits the cheapest price or even noticeably lower, I might buy 2 bottles. Let's make the assumption there is no uncertainty and they know it won't last very long.

    Asset value is more of a long term issue and with a period of deflation, it would re balance in the long run if it's supply side because demand would catch up... it is really interesting but don't just listen to everything in the textbook it's nice to consider other things and really evaluate the theory because there's always knock on effects which could change the whole outcome, the book is written on the basis of ceteris paribus which isn't how the economy works
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    (Original post by zayn008)
    Not necessarily, I'm not going to delay buying my milk because it'll be a little cheaper. However once it hits the cheapest price or even noticeably lower, I might buy 2 bottles. Let's make the assumption there is no uncertainty and they know it won't last very long.

    Asset value is more of a long term issue and with a period of deflation, it would re balance in the long run if it's supply side because demand would catch up... it is really interesting but don't just listen to everything in the textbook it's nice to consider other things and really evaluate the theory because there's always knock on effects which could change the whole outcome, the book is written on the basis of ceteris paribus which isn't how the economy works
    Well milk and food doesn't contribute much to the economy
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    (Original post by zayn008)
    Right but economic theory isn't always practical, apparently PFI's are a good thing if we follow their theory. If there's unexpected deflation that's a fair arguement but what if it were a target? Consumers would know things aren't going to fall in price forever. I'd argue it's bad in the short run due to consumers waiting for prices to reach the lowest and firms looking to stay in the market but in the long run aggregate demand would actually increase to rebalance with Aggregate supply, the outcome? More output, more trading, more competition. So a period of deflation which would have little effect on wages could actually restimulate the economy. Whilst it might be basic AS, it's just a theory and economics doesn't always play into theory
    Yeah I understand that theory isnt necessarily realistic but you're just going against the standard accepted theory with your own one. PFI was a bit of a disaster in part due to its execution though.

    you seem to propose somehow manipulating behaviour, if the moment behavioural patterns become impossible to predict then we're walking into a dark tunnel. AD wont naturally increase if there's speculation. It's very uncharted territory and has major economic ramifications. Deflation often reduce firm confidence and that is a complete disaster if firms really begin to make changes. They start liquidating and trying to secure their financial future, laying off workers and reducing output. It's a vicious cycle that can eventually become completely disastrous.
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    You're right, a small period of deflation can be beneficial but it's benefits are negligible especially considering the consequences of it.
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    (Original post by Wardog)
    Yeah I understand that theory isnt necessarily realistic but you're just going against the standard accepted theory with your own one. PFI was a bit of a disaster in part due to its execution though.

    you seem to propose somehow manipulating behaviour, if the moment behavioural patterns become impossible to predict then we're walking into a dark tunnel. AD wont naturally increase if there's speculation. It's very uncharted territory and has major economic ramifications. Deflation often reduce firm confidence and that is a complete disaster if firms really begin to make changes. They start liquidating and trying to secure their financial future, laying off workers and reducing output. It's a vicious cycle that can eventually become completely disastrous.
    PFI didn't deliver the promised efficiencies and has massive costs, it would've been better for the government to create a company with these firms as share holders, give tax payer funding but let the firms do most the management. That or work to make the public sector more efficient by introducing competition and deunionising it... but i guess if you consider in the context of everything remains equal, PFI is good in theory.

    I suppose in the economy if there is natrual deflation people lose confidence due to the effects likely being a fall in demand and spending, inefficiencies, etc. So they worry due to the uncertainty but like i said, without the uncertainty and with reassurance the deflation isn't caused by economic slowdown these effects can be negligible. So you're right in the theory about deflation since its often associated with economic slow down or some sort of market devaluation but what if it was pure supply side backed up by loose monetary policy (less QE, 0 interest (I wont go into neg. IR... we'll save that for another day) that would also encourage firms to borrow to expand and prevent down sizing

    I guess thinking about it now.. in the short run in might work, and maybe even in the foreseeable long run but i guess in the whole long run it'd lead to huge inflation because you'd have normal inflationary pressures, readjustment inflation to cancel out the deflation, and the 'hangover' demand created and many more things... it sounds like chaos.
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    I would assume if prices become so low the market will no longer be profitable and firms would have to leave the market resulting in supply to decrease. By firms leaving the market people lose there jobs which in turn results in people to become unemployed reducing Aggregate Demand in the economy. -I would assume business confidence would be low and greater reliance on state benefits
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    (Original post by zayn008)
    What's wrong with falling prices if it's due to supply side polices? I'm sure I'm missing a big piece of the puzzle but it should be a valid argument

    Consider it with the assumption that it's targeted so consumers know that prices have fallen but expect it to rise back to normal
    If deflation is light and lasts for a short time then it is fine. The problem in the long run is that once deflation feeds into price expectations consumers will delay consumption. A combination of falling costs and falling consumption then provides firms with less incentive to invest in new methods of production. Soon enough these factors can cause a meaningful reduction in aggregate demand.

    Light inflation in the long term is the goal.

    I will say deflation>hyper-inflation. As an Econ grad the thought of hyper-inflation is terrifying, the Austrians wrote a book about it... it's called 'When Money Dies'.
 
 
 
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