Prices of goods and services in a free market are determined by the forces of demand and supply. Thus you cannot have constant prices unless and until you have a constant demand for these good as and services along with a constant rate of supply
In general it is observed that demand increases faster than the supply which leads to an increases in prices over a period
However in unusal times, when demand falls you may actually see a fall in the general level of prices, which in technical terms is called “Deflation”
An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services.
Is deflation healthy?
Both, a high level of inflation and deflation impact the economy adversely
It is believed that moderate inflation over a period of time is good for the economy because it encourages producers to increase output
However, a high level of inflation or deflation has the opposite effect.
If inflation rises to very high levels then…
It reduces the purchasing power of the money in the hands of the people….
Resulting in a slowing down of demand for the goods and services produced….
Which in turn compels providers of these goods and services to reduce output
On the other hand, a deflationary scenario makes the production of these goods or services less lucrative and so encourages producers to reduce output.
In general it is observed that demand increases faster than the supply which leads to an increases in prices over a period
However in unusal times, when demand falls you may actually see a fall in the general level of prices, which in technical terms is called “Deflation”
An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services.
Is deflation healthy?
Both, a high level of inflation and deflation impact the economy adversely
It is believed that moderate inflation over a period of time is good for the economy because it encourages producers to increase output
However, a high level of inflation or deflation has the opposite effect.
If inflation rises to very high levels then…
It reduces the purchasing power of the money in the hands of the people….
Resulting in a slowing down of demand for the goods and services produced….
Which in turn compels providers of these goods and services to reduce output
On the other hand, a deflationary scenario makes the production of these goods or services less lucrative and so encourages producers to reduce output.
 |
Subscribe to Ashwin Group |
Visit this group |
No comments:
Post a Comment