Deflation is when the purchasing power of money goes up because of either a reduction in available currency or an increase in productivity. A sympton of deflation is a persistent decrease in the cost of goods and services.
Well, we should look at the two possibles causes of deflation. The first possible cause of deflation is a reduction in the amount of available currency and the second is an increase in the amount of goods and services available to consumers.
Let's take a look at this example. There are four oranges and four pounds, if we were to evenly distribute the amount of available money (£4.00) to the amount of available goods (four oranges), then each orange would be worth £1.00.
Now, let's take a look at this second example. The amount of available currency decreases from £4.00 to £2.00. Again, if we were to evenly distribute the amount of available money (£2.00) to the amount of available goods (four oranges), then each orange would be worth £0.50. You can see how the cost of each orange has decreased -- this is good for consumers because the price of goods goes down and they can buy more (this is known as an increase in the purchasing power of money), but its bad for the government because it shows the economy is moving very slowly (known as stagnation) and they need to respond by stimulating the economy and encouraging more people to spend money -- if the economy moves too slowly and stagnates, then the economy will grow very slowly and might begin to collapse.
Okay, now let's take a look at this third example. The amount of oranges increases from four oranges to eight oranges. Again, if we were to evenly distribute the amount of available money (£4.00) to the amount of availabe goods (eight oranges), then each orange would be worth £0.50 again. This is good for consumers because once again, the price of goods has gone down and they can buy more, it's also good for the government because it shows the economy is running smoothly and there is a lot of economic growth -- because there was an increase in productivity and more oranges were produced. This type of deflation is quite good and should be encourged.
You can see how the first type of deflation is quite bad in the long run, but the second type is very good for the consumers and in the long run. Normally, governments that aren't in debt will seek the second type of deflation, however indebted governments seek inflation and dislike both types of deflation. Why? Well, deflation is bad for debtors because they have to pay back debts tht were borrowed with higher-valued dollars, this effectively increases the amount of debt -- this is bad for indebted governments.
A lot of economists also believe that under deflation, consumers will choose to not spend and will wait for the prices to go down further -- however, some economists disagree with this idea because most people are going to buy something when they need it, they aren't going to wait a long time for the prices to go down and then buy it -- we have a mentality where everybody wants things when they're new and there are also certain things (like food) that we need now, not in the future. Though, this generally depends on your view.