Causes of inflation, Managerial Economics

Assignment Help:

Causes of Inflation 

At present three main explanations are put forward: cost-push, demand-pull, and monetary.

Cost-push inflation occurs when he increasing costs of production push up the general level of prices.  It is therefore inflation from the supply side of the economy.  It occurs as a result of increase in:

a.     Wage costs:  Powerful trade unions will demand higher wages without corresponding increases in productivity.  Since wages are usually one of the most important costs of production, this has an important effect upon the price. The employers generally accede to these demands and pass the increased wage cost on to the consumer in terms of higher prices.

b.    Import prices:  A country carrying out foreign trade with another is likely to import the inflation of that country in the form of intermediate goods.

c.     Exchange rates:  It is estimated that each time a country devalues it's currency by 4 per cent, this will lead to a rise of 1 per cent in domestic inflation.

d.    Mark-up pricing:  Many large firms fix their prices on unit cost plus profit basis.  This makes prices more sensitive to supply than to demand influences and can mean that they tend to go up automatically with rising costs, whatever the state of economy.

e.     Structural rigidity: The theory assumes that resources do not move quickly from one use to another and that wages and prices can increase but not decrease.  Given these conditions, when patterns of demand and cost change, real adjustments occur only very slowly.  Shortages appear in potentially expanding sectors and prices rise because slow movement of resources prevent the sector and prices rise because of slow sectors keep factors of production on part-time employment or even full time employment because mobility is low in the economy.  Because their prices are rigid, there is no deflation in these potentially contracting sectors.  Thus the process of expanding sectors leads to price rises, and prices in contracting sectors stay the same.  On average, therefore, prices rise.

f.     Expectational theory:  This depends on a general set of expectations of price and wage increases.  Such expectations may have been generated by a continuing demand inflation.  Wage contracts may be made on a cost plus basis.  


Related Discussions:- Causes of inflation

Macro-economic policy objectives, Macro-economic policy objectives The...

Macro-economic policy objectives The major macro-economic policy objectives which the governments strive to achieve are: i. Full employment One of the main objectives

Discuss the impact of conflict in an organization, Question 1: Explain ...

Question 1: Explain the central theme of Scientific Management. Do you think that the scientific management enhances productivity in the organization? Give your arguments.

Progressive tax, PROGRESSIVE TAX A progressive income tax system is on...

PROGRESSIVE TAX A progressive income tax system is one where the higher the income, the greater the proportion paid in taxes.  This is effected by dividing the taxpayers' inco

State the application of managerial economics, APPLICATION OF MANAGERIAL EC...

APPLICATION OF MANAGERIAL ECONOMICS Tools of managerial economics can be used to accomplish virtually all the goals of a business organisation in an efficient manner. Typical m

Per capita income to compare standard of living, PROBLEMS OF USING PER CAPI...

PROBLEMS OF USING PER CAPITA INCOME TO COMPARE STANDARD OF LIVING OVER TIME 1)       The composition of output may change. e.g. more defence-related goods may be produced and

Practical importance of knowledge-price elasticity of demand, Practical Imp...

Practical Importance of the knowledge of Price Elasticity of demand The practical importance of the measures of elasticity of demand is to be appreciated in various ways:

Question, what is deadweight loss calculation?

what is deadweight loss calculation?

Elasticity and consumption expenditure, The relationship between, total exp...

The relationship between, total expenditure and price elasticity of demand has summed up in the below table: Table: Elasticity and Consumption Expenditure Elas

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd