What is the impact of deflation?

Micro:firms lower revenue, lower profits, leave the market, shut-down point, supply falls. EVAL: supply falls offsets lower prices.lower wages as less spending means less derived demand for labour and so firms can also maintain profits from lower prices by cutting costs of production. Less disposable income, living standards can fall. EVAL: only effects those earning low wages, NMW, fixed incomesAs exports rise, governments gain export and corporation tax revenue. Can spend this money on welfare, education, infrastructure, healthcare, positive externalities, link to macro - AS curve. EVAL: lower profits, lower profits, less tax revenue. Priorities of the government. Extent of revenue. Austerity. Spend on national debt repayments.
Macro:lower consumption due to deferred spending as they expect prices to continue falling, lower aggregate demand, less inflation, negative economic growth. EVAL: likely to only effect luxury goods, normal necessities less affectedWages are sticky-downwards as workers are unlikely to accepts cuts to their nominal wage. Therefore when deflation occurs, real wage value rises, so there are more redundancies which leads to real-wage unemployment. EVAL: magnitude, if caused by a reduction in costs then firms are unlikely to reduce their quantity of labourinternational competitiveness, exports rise as relative prices fall, balance of payments, current account, AD, circular flow EVAL: AD increase will cause price level rise, also elasticity of exports, depends on inflation rates in other countries 

Answered by Aparna A. Economics tutor

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