Deflation is that when customers start using their powers to purchase more goods and services. This happens when the prices go lesser and demand goes higher. In it, the nominal cost of capital, labor cost, goods, and services costs each are affected. Every cost is at its minimal rate.
It is a very interesting and important thing for an economist. They always keep an eye of the deflation how thing goes in deflation. But inflation is the opposite of deflation, in inflation, the price of the goods and services goes up, and the consumers deduce the purchases. In inflation, the value of the currency goes strong, and in it, the value of the currency gets weaker.
It is the only situation customers enjoy because they can purchase a large number of goods and services at the minimum price.
Why Deflation Occurs?
There are several causes or factors because it occurs but variation in demand and supply is the major cause of deflation. When prices go high then demand will be less and when prices go lesser then demand will be higher.
- Change in Market Structures
When the customer gets the desired product at an affordable price that means the structure of the market is changed because competition is increased in the competitors and customers start getting things at affordable rates. Sometimes companies decrease the price of the product to increase the productivity of the goods this situation can take us to deflation.
- Increased Productivity
Sometimes new products and new features or strategies help us to increase the efficiency of the company. When the efficiency will having then your prize will also change, so the productivity of the goods will get affected.
- Decrease in Currency Supply
When the currency demand is less then suppliers decrease the supply of the currency then also it occurs. When there is a flow of money or peoples using money then only the supply of currency will not be affected.
- Strictness Measures
When the government imposes some rules and regulations then also deflation will occur.
- Persistent Deflation
Once it occurs, when it comes to an ugly stage then it will be very difficult for the economy to control the deflation. It is not easy to persist the deflation and overcome it.
What are the Effects of Deflation?
Deflation is like a storm. When deflation occurs economy will be fully damaged and it takes a longer period of time to repair the economy from the deflation. In some situations, it is not possible to recover from deflation. Some effects of deflation:
- Reduced Business Revenues
In it, companies decrease the prices of the goods and services to be in the market. As the prices go lesser and then the revenue will be gone less. When the revenue will be less than the definitely business will fall and recovery from the same business is difficult.
- Wage Cutbacks
When the revenue cost of the company goes decreasing then companies need to figure out how to save money from the employees. Then might be the start reducing the wages and the employees.
- Changes in Customer Spending
There will be a relation between the deflation and the customers. When companies start giving less to employees then customers will start saving their money and the spending will be lesser. So it will affect the economy and the spending also.
- Reduced Stake in Investments
When some countries economy goes into deflation then the investors have to think about the investment and the return of the investment. So investors start holding the money and they will get less interest rates.
- Reduced Credit
When it occurs then the financial lenders will start steps out from the operational field which various reasons. Assets value will go decrease, peoples not able to get the money which they have invested. Peoples, investors, and leaders will not able to get the money for the investments and form the businesses.
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