[+Donny]

I did not say they save 100%, when consume confidence drops (such as when lots of jobs are being lost and engineers are worried about being replaced with cheaper millitary people), spending decreases.

For the old engineers, yes, but what about those who just got jobs their (ex-military) and those who buy widgets who are employed elsewhere and have nothing to do with this wage drop? Nothing happens to their spending. In fact, it may rise because of the possible price drop in widgets.

You are killing our hypothetical economy. There are only 20 people in it, and only $800 in existance.

The the problem with our numbers is going to alter the results of the experimental economy. For one, half our economy is becoming suddenly unemployment, a much higher percentage that what would happen. Secondly, all wage-earners are affected by the drop in wages, which also would not be true in our economy. Finally, one would not fire all the military staff all of a sudden, but would fire some of it over a long period of time. While this may seem only to affect the ratio of the loss/gain for the economy, it also will add alter significantly things like consumer confidence and adds an unrealistic cap on the sales of widgets.

So here is our problem, extra engineers are not needed. What do you do with the displace millitary people? Sure, they can put some existing engineers out of jobs, but then what do you do with them? You would need to move to an economy where widget prices were so cheap realitve to labor, that many more widgets would be sold, requiring the full 20 people... The problem there is two-fold, you lower prices by selling volume, and raise volume by lowering prices; the other (probably bigger) problem is that there's only so much call for widgets.

The demand for widgets is the demand curve. Yes, there is a maximum number of widgets demanded, even if they were giving them out for free, but to say that the widget firm was providing widgets for everyone in the entire economy at the said price is just ridiculous. If there are other people in the economy, then the firm is given freedom to adjust price to find the most profitable spot on the demand curve, given the lower cost of production.

What do you think the Fed has been trying to get people to do Donny? They've been trying to make them spend. Why? Because we've had an economic downturn and people stopped spending... companies made less... people got laid-off and so people spent less still, causing comanies to make less still, etc. etc.

Actually, recent numbers make it quite clear that the economy is rising again, most likely do to Bush's tax cut, but that is for another thread.

You see? You even reiterated one of the problems... limited demand compared to ability to produce.

Umm, no. The elasticity of demand is its responsiveness to price. For example, a very elastic demand curve will drastically increase demand at a relatively small decrease in price, but will drastically reduce aggregate demand at a relatively small increase in price. I am not talking about a cap on the demand for widgets. If something is next to zero in cost, heck, why not buy 3 or 4 and sell a few overseas where prices are higher? Dropping the price increases quantity demanded.