Economics Question....Please Help!!!?

P

Patti

New member
Can someone please help me on this??? I would highly appreciate it if someone could explain this as thorough as you can....I will award 10 points to the one who can thoroughly explain this to me..Thanks :)

When one person saves, that person's wealth is increased, meaning that he or she can consume more in the future. But when everyone saves, everyone's income falls, meaning that everyone must consume less today. Explain this seeming contradition.
 
The answer is simple, and is currently why we are still in a recession.

When one person saves, interest eventually adds up. However, when everyone saves, no one is spending (or a very large portion of what could be spent is saved) and thus what is called a Negative Multiplier Effect comes into play.
Say I usually spend $120 a week on books, at the local Barnes. If I decide to save that $120, its not being spent at the bookstore and thus they see a fall in profit. Production Costs is the most logical route to draw from, and as such they lay off an employee. That employee usually spends $50 a week at the bowling alley. They got laid off, so they won't be spending any money there. So the bowling alley lays off someone. The cycle continues.

There's more to it of course, and generally I know I'm missing something. Its all complex. I hope I answered your question, at 'least' in part.
 
A person consumes less today to save. His wealth increases today, but not his consumption, he has to wait until tomorrow. And there are other persons who don't want to save today. So in total, the consumption of the economy may increase, and then income still. But if everyone saves today, the total consumption decreases, then the investment because the products cannot be sold, then the income.
 
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