Belt-Tightening and Rolls Royce

Paper Summary:

This paper examines the article "Psychology of Spending: Where Does Belt-Tightening Begin" by economist Cynthia Crossen, about the impact of the stock market shifts on perception of wealth and spending patterns. The paper thoroughly reviews the article and explains its economic basis, which is the theory of marginal utility. The author then applies this theory to the hypothetical question of purchasing a Rolls Royce Silver Cloud during an economic downturn. The author concludes that the car would ultimately be a good investment because its value depreciates extremely slowly.

From the Paper:

"As demand shifts downward because of a lackluster economy, the supply also shifts along with consumer needs. Since the consumer demand for certain goods such as luxury automobiles, state of the art electronics, CDs and other luxury goods decrease, the industry supply of such goods also will decrease. The article explains that in the Great Depression, many Americans went back to their rural roots because when they take on more primitive positions they feel less of the affects of the depression. In our current era, this has changed because of our governmental policies to prevent severe depression such as Social Security, welfare, and unemployment insurance. Therefore although consumer spending on luxury goods decreases, there is still a market for goods. Producers will continue to have a supply of goods as long as consumers are willing to spend money on luxury goods. The combination of our dependence of many luxury goods, and our ability to have money even during recessions makes it so that the overall restrictions on supply are not as stringent as if the recession was occurring during the Great depression or the recessions of the 1980s."

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