Bob said, "I am going to go and find out what we will be doing tomorrow. Then I will tell Marjorie that she will have to come with us."
"Let us do that," answered Beth. "She has always been helpful."
What's missing from this dialog (besides anything interesting)? Contractions! Nearly all of us use them (or 'em) when we talk. Most of us use them when we write as well. But there still seems to be a lot of misunderstanding surrounding the actual appropriateness/acceptability of their use.
It always seemed like a no-brainer to me to use contractions in dialog, since people use them when they speak. I tend to use them in narrative as well, unless I'm shooting for a very formal tone. I tend to write my stories in first or limited (tending towards deep) third person, so my narrative is written (or at least attempts to be) written in the pov character's voice. Unless there is a reason the pov character wouldn't use contractions, their absence feels a bit strange to me.
But budding writers often avoid their use, even in dialog. Some say it's because their grammar checkers have trained them not to use contractions. Others explain that their English teachers place their use on the same moral level as the torture of puppies. Still others claim they've heard that editors will summarily reject any fiction manuscript with contractions.
The grammar checker argument is easy to set aside, since grammar checkers are clearly designed by rabid squirrel monkeys who want to derail the human race's use of language. As for the English teacher argument, one must remember that teachers are training students to write very formal non fiction, and students tend to interpret the guidelines given in that context as immutable rules (even though, as stated above, these rules are changing, even in formal writing).
The comment that fiction editors hate the use of contractions is the only argument that bears investigation. I haven't had any conversations with professional editors on this topic, so I pulled several of my favorite fantasy books from my shelves and looked at their dialog. I found tons of contractions (and some in the narrative as well). Still, it's possible that the books on my shelf are an atypical subset of the population of published works.
So, I went to the web and did a little research. As it turns out, it's becoming increasingly acceptable to use the common English contractions in business correspondence and in technical writing, so long as they improve the flow and rhythm of the writing and convey the desired tone and voice (http://grammar.quickanddirtytips.com/contractions.aspx ; http://idratherbewriting.com/2008/06/26/myths-myths-myths-about-technical-writing/ ; http://brucemayhew.wordpress.com/2011/05/27/using-contractions-in-business-communication/).
This does not mean, of course, that different editors or publications don't have their own preferences or in-house styles (or that all readers will find a business letter with contractions more readable and friendly), but it does suggest that there is no hard and fast rule against using them anymore, even in formal writing.
So what about fiction? I did some more searching and found two different opinions about what the "rules" are, though all of these writers/editors agreed that rules in writing are often broken to good effect.
1. They're desirable in spoken and internal dialog, but not in narrative.
2. They're desirable in spoken and internal dialog and entirely permissible in narrative as well, so long as it suits the voice and style of the writer or pov character.
I suspect the differences in opinion over whether it's appropriate to use contractions in third person narrative are probably influenced by one's attitude towards a truly deep/immersive third person pov and the use of a more causal authorial voice in modern writing. It is entirely possible that editors have different opinions here.
But in spite of what many newer writers claim, it doesn't seem like there's any controversy over contraction use in dialog. As a rule, dialog will sound stilted and formal without them, so unless you are intentionally creating a context where a character is not using them for a clear reason, sprinkle in the standard English contractions.
Colloquial contractions (such as ain't) can also be used in dialog, of course, if it's appropriate for the character and setting.
Sometimes an author may use a situational or made-up contraction to indicate that a speaker is hurried or being careless in his speech. gonna, 'fraid, etc. are examples of these. Be sure these are being used in a way that's appropriate and are not overused to the point of rendering the character's speech incomprehensible or annoying to read.
When should contractions be avoided?
1. When they actually make the sentence more cumbersome to read/speak.
2. Faux historic speech that is not well-researched and actually appropriate for the overall setting or voice for the characters or narrative.
3. When there's a plausible reason a character wouldn't be using contractions. I can think of two books I've read in recent months that avoid contraction use in at least some contexts, and both of them worked quite well. But they are the exception to the rule.