Preview

Distinguish Between Cost Push and Demand Pull Inflation

Satisfactory Essays
Open Document
Open Document
833 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Distinguish Between Cost Push and Demand Pull Inflation
DISTINGUISH BETWEEN COST PUSH & DEMAND PULL INFLATION [10 Marks]
Can you remember how much you paid for the same items you buy now, two years ago? This increase in the general price level of goods and services in an economy is inflation, measured by the Consumer Price Index and the Producer Price Index; Commonly referred to as Inflation. There are however, different types of inflation’s, each affected by different factors.
Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been "pushed up" by increases in costs of any of the four factors of production (labor, capital, land or enterprise) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).
A company may need to increases wages if laborers demand higher salaries (due to increasing prices and thus cost of living) or if labor becomes more specialized. If the cost of labor, a factor of production, increases, the company has to allocate more resources to pay for the creation of its goods or services. To continue to maintain (or increase) profit margins, the company passes the increased costs of production on to the consumer, making retail prices higher. Along with increasing sales, increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcity of raw materials, an increase in the cost of labor and/or an

You May Also Find These Documents Helpful

  • Good Essays

    From Latin Mass to Being an Ass: Author Recounts Growing up Catholic in the '70s…

    • 583 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Papers

    • 325 Words
    • 2 Pages

    "Inflation" is defined as an increase in the overall level of prices over an extended period of time. Or in other words Inflation occurs when the supply of money far exceeds the supply of goods and services.…

    • 325 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    In order to address this question it is first necessary to define both inflation and aggregate demand. Aggregate Demand is the total amount demanded by the whole economy, ie it is not related to one single market. Inflation is the persistent increase in the average level of consumer prices compared to the same time the previous year. This is a natural occurrence over time as wages rise and so the quantity demanded increases, which activates the incentive price function and causes prices to rise, thus causing inflation. There are numerous types of inflationary pressure but nearly all can be subdivided into demand-pull or cost-push inflation.…

    • 634 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Ap Economics

    • 3812 Words
    • 16 Pages

    Inflation-The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.…

    • 3812 Words
    • 16 Pages
    Good Essays
  • Powerful Essays

    Economic Forecast Paper

    • 1557 Words
    • 7 Pages

    Inflation can be defined as the overall general upward price movement of goods and services in an economy (BLS, 2007). It is a continual rise in price levels and, subsequently, purchasing power is falling. The Consumer Price Index (CPI) measures inflation as experienced by consumers in their day-to-day living expenses and is separated into two groups or populations of consumers: The CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W).…

    • 1557 Words
    • 7 Pages
    Powerful Essays
  • Satisfactory Essays

    | Increase in supply and demand because manufacturing faster increases supply which decreases price causing an increase in demand.…

    • 630 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    Inflation is the general increase in the price level and results in the value of money falling. The government sets a target rate of inflation of 2%, measured by the consumer price index within a band 1% above and 1% below the target. Currently inflation is 2.6% and is inside the target rate even though the U.K economy is in a recession. Even though the monetary policy is used by the Bank of England to control inflation, supply side policies could be used to help improve the productive capacity of the economy and shift the long run aggregate supply curve to the left, to bring prices down. There are two main causes of inflation; demand-pull and cost-push inflation. Demand-pull inflation is when demand for goods and services exceeds supply and cost push inflation is when a firm experiences an increase in prices in order to maintain profit after experiencing a rise in costs.…

    • 1486 Words
    • 6 Pages
    Better Essays
  • Satisfactory Essays

    Inflation is a sustained general rise in the price of goods, measured by the annual percentage increase in average prices.…

    • 715 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Inflation and Price Indexes - When the general price of goods and services rise, it is called inflation. If inflation starts to slow…

    • 888 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Inflation in the Uk

    • 1025 Words
    • 5 Pages

    Inflation is the general increase in prices of goods and services in an economy. When the purchasing power falls, currencies tend to lose some of its value. A measure of price in inflation is the inflation rate; it’s the annualized percentage in a general price index (also known as CPI) over time. Inflation is very infrequent and the price level is as likely to fall, as it is to rise.…

    • 1025 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Inflation is measured by the Consumer Price Index (CPI) and the Retail Price Index (RPI). The difference between CPI and RPI is that CPI excludes housing costs whereas RPI doesn’t, and also RPI excludes people in the top 4 per cent of earners. Central banks attempt to stop severe inflation along with sever deflation in an attempt to keep the excessive growth of prices to a minimum. A rising rate of inflation can potentially have beneficial and negative effects on an economy.…

    • 622 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Economic Adviser Paper

    • 1082 Words
    • 5 Pages

    Aggregate Supply is the total of supply of goods and services at a total price level in a given period within a nation 's economy. The increased supply of products requires more workers thus decreasing…

    • 1082 Words
    • 5 Pages
    Better Essays
  • Satisfactory Essays

    Many of us have heard our grandparents talk about the “good old days” when you could buy ice cream for a nickel or a movie ticket for a quarter, as opposed to now where a simple small ice cream cup is usually equivalent to about three dollars. Inflation is directly responsible for these rises in price. Today consumer price inflation is averaging at…….Theories for the cause of our countries inflation range between three theories that the demand for goods and services exceeds exsisting supplies, so prices skyrocket. Also, it is also believed through the cost-push theory that when producers raise prices in order to meet increased costs inflation also occurs. In addition, inflation occurs when there is too much money in the economy at once. High inflation has numerous negative effects on the economy. For example, it can virtually erode purchasing power. In an inflationary economy, a dollar cannot buy the same amount of goods as it did in the past, as I stated previously in my ice cream example. Inflation also can deteriorate…

    • 595 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    inflation and employment

    • 3298 Words
    • 11 Pages

    First of all, there are two types of inflation, monetary inflation and price inflation. Monetary…

    • 3298 Words
    • 11 Pages
    Good Essays
  • Good Essays

    Elasticity of Demand

    • 1305 Words
    • 4 Pages

    In the real world, prices of different products vary day by day, however, the effect it has on the demand is a concept that is very important to understand. When a consumer has an ability or willingness to buy a certain number of products at a given price, it is known as demand. Elasticity of demand is the measure of change in quantity demanded of a product when there is change in factors that effect demand. There are 3 main types of elasticity of demand; Price elasticity demand, Income elasticity of demand and Cross elasticity of demand. This is a concept applied in many markets and it helps many external beneficiaries whether or not to increase price on a certain product. This text will help explain the 3 types of elasticity of demand in depth and provide examples.…

    • 1305 Words
    • 4 Pages
    Good Essays

Related Topics