Cost push or supply inflation, Microeconomics


Cost Push or Supply Inflation:

It is a situation where the process of increasing price level is caused by increasing costs of production which push up prices. Cost push inflation is also referred to as supply inflation. Price level in this case increases due to an increase in business costs. These increases in prices occur in the face of high unemployment and slacken resource utilization. The increase in cost of production causes supply of final goods and services to fall. This creates excess aggregate demand and a new equilibrium is attained at a higher price level.

668_Cost Push or Supply Inflation.png

The Figure above illustrates the process of cost push inflation.The aggregate demand and aggregate supply curves intersect at point ‘E1’ and the general price level is P1 and output is at Y1. Assuming there is an increase in cost of production via increased wages throughout the economy, the aggregate supply curve will shift upward from AS1 to AS2. The general price level will increase and output will fall from Y1 to Y2. If this process continues it leads to another round of increase in cost of production. Aggregate supply falls from AS2 to AS3 and the general price level, rises from P2 to p3. Output will fall again to Y3.

Posted Date: 1/3/2013 12:26:24 AM | Location : United States







Related Discussions:- Cost push or supply inflation, Assignment Help, Ask Question on Cost push or supply inflation, Get Answer, Expert's Help, Cost push or supply inflation Discussions

Write discussion on Cost push or supply inflation
Your posts are moderated
Related Questions
1. Why is a proprietary good necessary for a firm to choose to become a multinational? 2. In Ramondo, Rappoport, and Ruhl (2011), "Horizontal vs. Vertical FDI: Revisiting Evi

An important aspect of municipal finance involves capital budgeting and resource allocation.  In some cases, resource allocations involve expenditures that are not directly revenue

The total demand consists of: 1. New owner demand and 2.A replacement demand The replacement demand tends to grow with the in the total stock with the consumers. Once a pe

Foreign investment: To attract foreign investment – Developing Plans are used as a means of attracting foreign investment or foreign aid.Foreign government and international o

how can draw the table and diagram of production function function with one veriable

Sir i am the student of MSC Economcis frin Dustabce University (AIOU)from Islamabad (Pakistan)my name is Mohammed Bilal Farooq and required the answer of the following questions Q

ESTIMATION OF NATIONAL INCOME: In India, the first attempt to estimate national income and per capita income was made in the year 1867-68 by Shri Dadabhai Naoroji. This was fo

what is ''Prisoner''s Dilemma'',of non-cooperative game?estion..

Discretionary Fiscal Policy: Some government taxing and spending programs can be adjusted by government in response to changing economic circumstances. These discretionary measures

uses of time series in indian economy