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July 14, 2024 

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WHAT?: One of three basic questions of allocation (the other two are How? and For Whom?). Answering the 'What?' question of allocation determines the types and quantities of goods and services produced with society's limited resources. Should society produce hammocks or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships? The production possibilities analysis sets the stage for answering the 'What?' question.

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DEFLATION:

A persistent decrease in the average price level in the economy. This is the direct opposite of inflation, a persistent increase in the average price level. Like inflation, deflation occurs when the AVERAGE price level decreases over time. While some prices might decrease, other prices could increase or remain unchanged, deflation occurs if the AVERAGE follows a downward trend. Another related phenomenon is disinflation, a decrease in the inflation rate.
Deflation is a rare phenomenon indeed in the economy and typically happens during prolonged periods of (1) contractionary stagnation or (2) technological-induced expansion. Deflation could appear during a fairly lengthy recession or occasional depression, when aggregate demand has dried up substantially. With no one buying goods, producers reduce prices and deflation results. Deflation also can emerge during expansionary periods driven by significant technological advances, when the economy has the ability to provide more production at lower cost. Following declining production cost, the price level also falls and the result is deflation.

While lower prices might seem like an unqualified plus for the economy, such is not always the case. A lower price does mean that the purchasing power of money and income is greater and that the cost of living is less. This is a good thing.

However, deflation can create uncertainty and a haphazard redistribution of income just like inflation.

  • Uncertainty: First, deflation creates uncertainty just like inflation. If prices unexpectedly decline, then consumers and producers alike might be less willing to pursue long-term activities, because they just do not know what will happen to the price level.

  • Haphazard Redistribution: Second, deflation can haphazardly redistribute income and wealth just like inflation. If some prices decrease more than others, then income and wealth is redistributed to the owners of those resources with the smaller price decreases.
In the same way that inflation results when the aggregate demand for production persistently exceeds the aggregate supply of production, deflation occurs when the aggregate demand for production persistently falls short of the aggregate supply of production. While a number of factors can trigger such an imbalance, persistent deflation is only possible in the long run if the money supply declines.

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Recommended Citation:

DEFLATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: July 14, 2024].


Check Out These Related Terms...

     | price level | price index | inflation | disinflation | cost of living | inflation problems | inflation causes | inflation rate | Consumer Price Index | GDP price deflator |


Or For A Little Background...

     | business cycles | expansion | macroeconomics | macroeconomic goals | macroeconomic problems | production possibilities | gross domestic product | real gross domestic product | nominal gross domestic product |


And For Further Study...

     | demand-pull inflation | cost-push inflation | Producer Price Index | Wholesale Price Index | CPI and GDP price deflator | unemployment | Bureau of Labor Statistics | Bureau of Economic Analysis | National Income and Product Accounts | shortage | circular flow | stabilization policies | production cost |


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     | Bureau of Economic Analysis | Bureau of Labor Statistics |


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