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Friday, November 30, 2007

Fewer Sales? Wonder why...

For the month of October 2007, the Commerce Department reported that sales were low across the U.S. according to the AP article "Consumer Spending Slows in October." Some reasons given were the higher gas prices and the mortgage defaults. In the article, chief economist Naroff stated that, "'Consumers are still spending thought not nearly at the pace they had been.'" This seems like common sense. If one does not have the money to buy something they have to forgo purchasing it or buy in fewer quantity.

One can easily understand this if they use an indifference curve analysis. When doing this one will assume that the individual's budget line stays constant as prices for items change. Personally, when I purchase gas to drive my car I have to give up that total cost from my budget. This leaves me with a certain amount to spend on everything else. At this point I am indifferent to the amount of gas I consume and everything else. But as the gas prices rise, my ability to purchase other goods decreases as my budget shrinks or swings inward. This moves me to a different indifferent curve which makes me worse off from my previous preference.

At the end of the article the writer mentioned another interesting factor that seemed out of place. "The concern is that if the economy weakens and layoffs increase, consumers won't have the income growth needed to support spending." Since income is usually needed to consume things, this would not be a good thing. But yet there is something worse, such as the lose of income would decrease the amount of investment and savings which an economy needs to stay "healthy" and strong. It seems that this is the bigger issue that should be addressed more than the fewer consumable purchases and not just thrown in at the end of an article.

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