Debtors can pay their debts with money that is less valuable.Cost of living increases, making families struggle to keep up as the price of everything increases faster than the take-home pay they receive from employers.Deflation can be defined as the decrease in the general price level of goods and services.Deflation can occur because of a combination of four factors:It discourages consumer spending. Management is likely to have to spend more time dealing with workers' pay claims...- Instead of being able to sign a two or three year deal, annual pay negotiations are likely to be the norm. In terms of SLSL, the time and money spent researching these deals probably wouldn't be worthwhile as SLSL only had a stock value of £5,000 at the end of 2011, thus meaning they could probably remain profitable with the same suppliers.- This is because customers have to be made aware of these new prices. It is only when inflation rates rise considerably that businesses may need to adapt their strategiesSLSL might strategically respond to an increase in the rate of inflation by charging higher commission rates...- If the rate of inflation increased in the future by a significant amount SLSL would face increases in its costs either from overheads or higher wages. Once people expect price declines, they delay purchases as long as possible. It currently charges on average around 1% based on the negotiating skills of staff, which could be raised to 1.5% - 2% in order to match inflation and prevent SLSL from losing out on revenue in the long-term.SLSL might strategically respond to an increase in the rate of inflation by reducing its costs...- The Roleys idea of web based marketing may be a better idea than pushing up commission rates as the costs of physical premises are likely to increase greatly with a high rate of inflation. - Equally, even quite low levels of deflation can have a significant impact on business.
Typically the economy is booming and output (aggregate supply) is not keeping up with the spending of customers (aggregate demand. Deflation means the businesses are being forced to cut their prices...- When deflation initially occurs, businesses may choose to pay for the price cuts by simply cutting their profits or accepting a loss for the year. This is particularly true if inflation is fluctuating.
Therefore, it can be said that inflation helps keep the wheels of an economy turning .Deflation in certain asset classes can be good, like in the price of consumer goods, especially electronic equipment. As prices fell, companies went out of business. Inflation is when prices rise, and deflation is when prices fall. )This occurs when costs of production rise without there being any rise in aggregate demand in the economy.
- Inflation isn't necessarily a problem.
But decisions have to be made now which will affect the business in the long term. They also become less willing to borrow money, not knowing what will happen in the future.
In terms of SLSL this probably wouldn't come at much of a cost as they may only need to update their website and change some signs in the window. More people became unemployed.The opposite of deflation is inflation, which is when prices rise. This is because if consumers believe prices will rise they will purchase now rather than wait and pay more in the future. Deflation doesn't occur very often in the UK, and mostly occured between 1920 and 1930.- If inflation is low, businesses are unlikely to need to have strategies to cope with changing prices. So there is considerable difference between 2% inflation per year, which has little or no effect on business, and 2% deflation. (e.g.
Prices dropped 10% a year. By only operating online, SLSL will benefit from a significant reduction in costs, allowing the business to survive without having to charge more to customers. So people react by saving more to make up savings to their previous real value. As unemployment rose, demand for goods and services fell. I can scamper really quickly and cheaply between either poles and straddle them both if necessary. That is a 50/50 hedge between inflation and deflation, so I’m taking both possibilities seriously. - This is caused by too much demand in the economy as a whole. - With high and fluctuating inflation, businesses don't know what prices will be in three or six months time, let along in one or five years. If prices are rising by a few per cent each year, and the inflation rate is fairly constant, inflation is likely to have little impact on businesses.
Both are very difficult to combat once entrenched. Borrowing and lending becomes and opportunity and a problem for businesses...- Inflation initially benefits borrowers and harms lenders.Consumers react to inflation as well as businesses...- Prolonged inflation tends to lead to more saving. As businesses and people feel less wealthy, they spend less, reducing demand further. This may even give SLSL a USP, if competitors raise their commission rates to cope with inflation. - like inflation, deflation causes resources to be: *wasted when firms incur menu costs *misallocated when firms respond incorrectly to falling prices - unanticipated deflation hurts borrowers even more than lower than expected inflation would - deflation can push an economy into recession and make an existing recession worse This is technological innovation, and it keeps producers competitive.Deflation slows growth. When taken to their extremes, both are bad for economic growth, but for different reasons. Prices drop in response, giving businesses less profit. The value of savings tends to fall as inflation erodes their real value. Constant cost-cutting means lower wages and less investment spending. For example, if everyone expects inflation to be 2%, then workers will negotiate pay rises of 2% plus a little more to give them higher spending power than before. Stable inflation is maintained through the role of expectations...- If all economic agents in the economy expect inflation to be the same as before, then they will act in a way that ensures that it is achieved. This is because innovation in manufacturing, which results in lower prices for many consumer goods.