Cost-Push Inflation vs. Demand-Pull Inflatওion: An Overview

Two of the main driveꦫrs of inflation are cost-pus♌h inflation and demand-pull inflation.

Cost-push inflation is a decrease in the aggregate supply of goods and services, often stemming from an increase in the cost of production. Demand-pull inflation is an increase in aggregate demand. "Aggregate" means all four sections of the economy: households, businesses, governments, and foreign buyers.

Cost-push inflation and demand-pull inflation are two of the potential causes of inflation. The others are an increase in the 澳洲幸运5开奖号码历史查询:money supply of an economy and a decrease i🎐n the demand for money.

Inflation is the rate at which the overall prices of goods and services rise. This, in turn, causes a drop in 澳洲幸运5开奖号码历史查询:purchasing power. The prices of individual goods and services rise and fall all the time. However, inflation happens when prices rise across the economy to ꦺa measurable degree.

Cost-Push Inflation

Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When the 澳洲幸运5开奖号码历史查询:aggregate supply of goods and se🧸rvices decreases, often due to an increase in production costs, it results in cost-push inflation.

Cost-push inflation means prices have been "pushed up" by increases in the costs of any of the four 澳洲幸运5开奖号码历史查询:factors of production—labor, capital, land, or entrepreneurship—when companies are already running at full production capacity. Companies cannot maintain 澳洲幸运5开奖号码历史查询:profit margins by producing the same amounts of goods and services when their costs are higher and their produ🦩ctivity𒐪 is maximized.

The price of 澳洲幸运5开奖号码历史查询:raw materials may also cause an increase in costs. This may occur because of a scarcity of raw materials, an increase in the cost of labor to produce raw materials, or an🌞 increase in the cost of importi꧅ng raw materials. The government may also increase taxes to cover higher fuel and energy costs, forcing companies to allocate more resources to paying taxes.

To compensate, the increase in costs is passed on to consumers, causing a rise in the gene♔ral price level: inflation. Another way cost-push inflation occurs is that the supply of the final product declines or grows slower th🐟an the demand because the high costs discourage production. Since supply no longer meets demand, prices rise.

The Demand Factor

For cost-push inflation to occur, demand for goods must be static or 澳洲幸运5开奖号码历史查询:inelastic. That means demand must r🐼emai𝐆n constant while the supply of goods and services decreases.

An example of cost-push inflation is the oil crisis of the 1970s. The price of oil was increased by OPEC countries while demand for the commodity remained the same. As the price continued to rise, the costs of finished goods also increased, resulting in inflation.

The price-quantity graph below demonstrates how cost-push inflation works. It shows the level of output that can be achieved at each price level. As production costs increase, aggregate supply dඣecreases from AS1 to AS2 (given production is at full capacity), causing an increase in the price level from P1 ๊to P2.

Compa♒nies that want to maintain or increase profit margins will need to raise the retail price paid by cons♉umers, thereby causing inflation.

Demand-Pull Inflation

Demand-pull inflation occurs when there is an increase in aggregate demand, which consists of the total demand from four sections of the 澳洲幸运5开奖号码历史查询:macroeconomy: ho🦋useholds, bꦦusinesses, governments, and foreign buyers.

When concurrent demand for output exceeds what the economy can produce, the four sectors compete to purchase a limited amount of goods and services. That means the buyers "bid prices up" again and cause inflation. This excessive demand, also referred to as "too much money chasing too few goods," usually occurs in an expanding economy.

The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. For example, an increas💙e in government spending can increase aggregate demand, thus raising prices.

Another factor can be the depreciation of local 澳洲幸运5开奖号码历史查询:exchange rates, which raises the price of imports and, for foreigners, redu🧜ces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases. This raises the overall level of aggregate demand, assuming agg🐬regate supply cannot keep up with aggregate demand as a result of full employment in the economy.

Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. Finally, if a government reduces taxes, households are left with more disposable income in their pockets. This, in turn, leads to an increase in consumer confidence that spurs 澳洲幸运5开奖号码历史查询:consumer spending.

Supply and Demand

Looking again at the price-quantity graph, we can see the relationship between aggregate supply and demand. If aggregate demand increases from AD1 to AD2, this will not change aggregate supply in the short run. Instead, it will cause a change in the quantity supplied, repr🥀esented by a movement along the AS curve.

The rationale behind this lack of shift in aggregate supply is that aggregate demand tends to react faster to changes in economic conditions than a🙈ggregate supply.

As companies respond to higher demand with an increase in production, the cost to produce each additional output increases, as represented by the change from P1 to P2. That's because companies would need to pay workers more money (e.g., overtime) and/or invest in additional equipment to keep up with demand.

Just like cost-push inflation, demand-🐻pull inflation can occur as companies pass 🙈on the higher cost of production to consumers to maintain their profit levels.

Special Considerations

Governments and central banks have ways to counter both꧒ cost-push inflation and demand-pull inflation.

To counter cost-push inflation, 澳洲幸运5开奖号码历史查询:supply-side policies need to be enacted with the goal of increasing aggregate supply. To increase aggregate supply, taxes can be decreased on business to stimulate production. Government action can be taken to lower the costs of𒊎 raw materials or to help increase access to them.

Countering demand-pull inflation would be achieved by the government and central bank implementing contractionary monetary and 澳洲幸运5开奖号码历史查询:fiscal policies. This would include increasing th🎐e interest rates, decreasing government spending, 🙈and increasing taxes, all measures that would reduce demand.

The Bottom Line

The law of supply and demand is the linchpin of a market economy. What could go wrong? Two big things that can go wrong are cost-push inflation and demand-pull inf🍸lation.

Cost-push inf𒐪lation is caused by a shortage of supply. Demand-pull inflation is caused by an increase in demand. Both cause negative impac🐻ts for consumers and businesses.