Cost push or supply inflation, Microeconomics

Assignment Help:


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.


Related Discussions:- Cost push or supply inflation

Types of inflation in a country, (a) Describe the different types of inflat...

(a) Describe the different types of inflation in a country. (b) Describe the trade-off between inflation and unemployment, using appropriate diagrams. (c) Mauritius has bee

Economic models, the general characterictics of economic models,its limitat...

the general characterictics of economic models,its limitations and verification

Types of budget, Types of budget: Surplus Budget: A surplus budget o...

Types of budget: Surplus Budget: A surplus budget occurs when the expected government revenue is planned to exceed the proposed government expenditure. It can be achieved by

Explain about the money metric utility functions, Explain about the money m...

Explain about the money metric utility functions. The Money Metric Utility Functions: It is a nice construction including the expenditure function which comes up into a vari

Estimating the educational structure, Estimating the Educational Structure ...

Estimating the Educational Structure of the Labour Force in the Economy for the Target Year The educational levels of persons within each occupational structure for the base y

Shutdown point, when does a buisness reach shutdown point

when does a buisness reach shutdown point

Calculate profit maximizing output level , Qustions: You are the sales ...

Qustions: You are the sales manager at SoftSystem, a dominant firm that produces operating system. The new operating system, Doors XR, has been newly developed. Its demand is e

Oligopoly, little kona is company that is considering enter a market by big...

little kona is company that is considering enter a market by big brew

Scarcity choice and opportunity cost, (a) Differentiate between a  command ...

(a) Differentiate between a  command economic system and a laissez-faire. (b) Assess to what extent it is advantageous for an economy when it moves from a controlled to a free-e

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