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
WHAT IS A PRODUCTION FUNCTION SCHEDULE?

Banking Infrastructure: An efficient financial system can influence the long-term growth through three important channels, namely: 1) increase in the proportion of saving tran

What is meant by dumping? Dumping is when a producing country dumps goods on foreign markets at a price lower than either the price on the home market or below the cost (HL: ma

What are the uses of elasticity to the private sector

Current Daily Status(CDS): The reference periods (i.e. a year, a week and a day) are basically used to describe the period for which the workers are employed in the economy. T

explain how macro and micro issues may be represented using production possibility curve

when the demand function is 2Q-24+3P=0,find the marginal revenue when Q=3.

The U.S. automobile industry, the soft-drink industry, the brewing industry, segments of the fast-food industry, and airplane manufacturers. Oligopoly will usually produce less tha

Slutsky's Theorem: Graphical Presentation  We prove here that own price effect is the sum of own substitution effect and income effect for a price change, which is known

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4