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

How can we test adulterants in vegetable oils?

what are the solutions to cost push inflation

What is the graph of the production possibilities frontiers for the American and Japanese economies if American worker can produce 10 tons of grain a year and Japanese worker can p

williamson''s model of managirial discretion


Reorganisation of Export Councils: India has a large number of exporpromotion councils, commodity boards and other similar agencies, butheir impact on India's foreign trade h

Question 1: (a) Using examples, explain the difference between time-series, cross-sectional, and panel data. (b) Formulate a simple linear equation, and carefully explain

Privatisation in the narrow sense can take several forms: a) Total Denationalisation: This implies complete transfer of ownership of apublic enterprise to private hands. Some

Name the five types of capital. The five types of capital are:  natural capital, manufactured capital, human capital, social capital and financial capital.